Monday, November 10, 2008


Often employee contributions, and employer matches, to a pre-tax employer pension or savings and investment plan will be invested in the stock of the employer-corporation.

When the employee leaves the company he/she can (a) remain in the plan until retirement age (if allowed by the plan), (b) roll-over the balance in the plan to another tax-deferred account and continue to defer taxable income, or (c) “take the money and run” and be currently taxed on the distribution.

If the employee holds appreciated stock in his former employer’s company in the plan, he/she should not roll-over the stock to an IRA. The thing to do is to withdraw the actual shares of company stock and rollover any remaining cash balance.

The employee will receive a 1099-R reporting a taxable distribution equal to his/her “basis” in the company stock, which is generally the total amount of employee contributions used to purchase the stock. The employee will not be taxed on the full market value of the stock on the date of distribution.

The difference between the basis and the market value is referred to as “net unrealized appreciation” (NUA). This NUA is not taxed until you actually sell the stock. When the stock is sold the NUA, plus any additional gain, will be taxed as a long-term capital gain at the special preferential tax rate – which could actually be “0%” depending on the circumstances.

If you roll-over the company stock to an IRA, when you withdraw money from the rollover IRA it will be fully taxed at ordinary income rates. You would lose the tax benefit of capital gain treatment on the net unrealized appreciation.

You can sell the company stock right away. You do not have to wait to actually hold the stock for a year after the date of the withdrawal – the sale will automatically be considered to be long-term.

Of course, as with any other distribution from such a pension plan, if you withdraw the shares of stock before your reach age 59½, (or if you were not age 55 when you left the company) you will be subject to the 10% premature withdrawal penalty on the taxable value of the stock, which is again your basis in the shares withdrawn.

Any questions?


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