Maximizing the hidden tax strategy behind Net Unrealized Appreciation
The idea of saving as much as possible during your career while making wise investments to have a comfortable retirement is nothing new for workers. But if you don’t consider a tax strategy with that plan, it can derail any retirement.
Many workers are able to get company stock either as part of their compensation or through the company’s 401(k) program and these are the stocks you want to pay attention to so you don’t lose money in taxes.
Typically, when people retire, they roll all of their 401(k) to an IRA and everything you paid for that company stock inside the 401(k) and all the appreciation through your working years will be taxed at your personal income rate when you take money out to supplement your retirement.
Instead, if you use the Net Unrealized Appreciation – or NUA – rules, you can roll the stock out of the 401(k) and pay ordinary income taxes only on the cost basis, or what you paid for the stock through the years. Then, if done correctly, you can have the appreciation of the stock taxed at the much lower capital gains rates. For most people, this could cut your tax bill almost in half.
For example, let’s say that you have $300,000 of company stock in your 401(k), that you paid $100,000 for. You roll the stock out of your 401(k) to a non-IRA account. You will pay taxes on the first $100,000 at your ordinary income rate, but the additional $200,000 would be taxed at your capital gain rate, which can be a much lower rate.
The federal Income tax rates can be as high as 37%, and capital gains tops out at 20%. So in this scenario, you can save as much as $34,000 and even more for those states that have a state income tax, like Ohio does.
You may think that whenever you have NUA-eligible assets, you should always take advantage of the opportunity. But that’s not necessarily the case because there are scenarios where it doesn’t make sense to do so.
There are many nuances in dealing with retirement account distributions, which is why it’s always helpful to work with a financial advisor. At Lineweaver Financial Group, we have a team of professionals at the ready to help coordinate all your financial needs and make sure we create a plan that works for your unique situation. Give us a call today. We’re here to help!
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