Planning Conversation Can Net Unrealized Appreciation Benefit

Sheaff Brock | Index Income Overlay | covered calls | net unrealized appreciation | financial planning

Planning Conversation Can Net Unrealized Appreciation Benefit

It’s right there in Section 402 (e)(4)(B) of the IRS publication—that part about net unrealized appreciation. Without having in-depth planning conversations with their advisors, clients might miss out on important tax benefits.

In an interview with our SheaffBriefs editor, Sheaff Brock Senior Vice President of Investments Christy Jordan pointed to the following statement in the IRS Code:

Section 402(e)(4)( B) provides that in the case of a lump sum distribution which includes employer securities, there shall be excluded from gross income the net unrealized appreciation attributable to the employer securities.

When you retire, Jordan explained, one big decision will be how to distribute the assets in your 401(k) and other employer retirement plans. If a big chunk of the plan assets consists of company stock, doing the typical IRA Rollover may not be your best alternative.

You might need to have that 3-way (tax advisor/financial advisor/client) conversation IF:

  • you have a sizable company stock position in your qualified retirement plan(s)
  • the value of the company stock in the plan(s) has increased a great deal
  • you’re 59½ or older
  • you want to begin using at least part of the money for retirement income relatively soon
  • you don’t expect your income level (or your tax rate) to drop soon (perhaps you plan to work part-time)
  • you want to pass the stock to your heirs upon your death, taking advantage of the “step-up” in basis.

O.K. You and your advisor team have completed that in-depth study of the different options for handling your plan assets, and you’ve chosen to take advantage of Net Unrealized Appreciation. How will it work? There are two parts to do now and one that you’ll do later, perhaps in different stages spread over time:

Part One: You take a distribution of employer stock into a TAXABLE brokerage account. You pay income tax on this transaction, but only on the cost basis of the shares.
Part Two: You roll the remainder of the plan assets into an IRA rollover account.
Part Three: (This one may be done immediately or in stages over a long period of time.) You sell shares, paying tax on the transactions at the capital gains rate, not at ordinary income tax rate.

P.S.  One big advantage of having the stock in a nonqualified account is that you are not obligated to take Required Minimum Distributions beginning at age 70½.

Tax advice is not something any of our advisors offer clients, Christy Jordan was careful to remind our SheaffBriefs editor, and a Net Unrealized Appreciation (NUA) strategy is hardly the stuff for Do-It-Yourselfers.

There are many variables, including age, estate planning goals, expected tax rate in retirement, and the extent to which the amount of stock constitutes too much of a client’s net worth.

Once the NUA has been executed, there are a number of investment tactics which can be explored, including:

But, first, that Net Unrealized Appreciation decision needs to be made. What’s the “signal” alerting Sheaff Brock advisors to recommend getting started with that all-important conversation? Any client who has a long-term relationship with a publicly traded company!

Contact your Sheaff Brock Portfolio Consultant to start the conversation about your NUA strategy.

Share this post