When you retire, you are frequently told to rollover your company retirement account, such as your 401(k) funds, into an IRA or into another company's plan in the event you choose to continue working. Nonetheless, whatever you are doing - do not rollover any of your company's stock you bought within the company's retirement program. (As an example, if you work for Chevron, do not roll ovefr the Chevron stock you hold in your 401k). There is a big income tax relief if you comply with this warning. That's because company shares will get better tax treatment that may save you taxes.
Any assets you roll into an Individual Retirement Arrangement will be taxed at your normal income tax rate when you withdraw it. Normal income tax rates are the highest with marginal tax rates going to 35%. If you roll-over that company stock, it'll lose its prospective lower tax treatment and be subject to taxes as normal income like anything else in your Individual Retirement Arrangement.
Therefore, ask that shares of your employer be dispersed to you for the advantage of the specific income tax relief that IRS gives to employer stock held in an employer retirement plan. Upon receiving the shares, you'll need to pay ordinary income tax on the amount you initially paid for the stock in the company plan. That purchase price will then be your 'basis' in the stock. But ideally, the stock's value has appreciated considerably since you purchased the shares.
For example, suppose an employee buys $20,000 worth of his employer's stock in his 401(k) plan, and it grows to be worth $200,000. If that stock is rolled over to an IRA, it'll be taxed as normal income at a rate of as much as 35 % when he withdraws it. No income tax relief there.
The difference between the stock's current market value and your tax basis in them is the 'net unrealized appreciation' (NUA) ($200,000 - $20,000). This NUA is the gain you'll have in the event you sold the stock immediately. In case you did, you'd be taxed on the gain at the lower 'long-term' capital gains rate no matter how long you owned that stock since it's all handled as being kept long-term. Therefore the income tax relief on the gain might be the difference between 35% and 15% the current capital gains rate.
You may wait on liquidating the shares - maybe sell it in parts as time passes or hold the shares indefinitely. No matter when you sell, on that first $180,000 of profit, you only pay at the long-term capital gain rates. Capital gain tax rates are currently 0% or 15% according on your marginal income tax bracket being at/under or over 25% (true through 2012).
In the event that, our taxpayer takes a distribution of that stock from the retirement plan, he would be subject to taxes at normal income tax rates on his initial buy of $20,000 in the year of distribution. That $20,000 basis is taxed today, maybe $5,000 in taxes (assuming a hypothetical 25% tax rate). But, there is no current tax on the $180,000 of stock appreciation (i.e. gain or NUA) till he liquidates the shares, whenever that may be! And when he does sell it, he'll be taxed on that gain at the long-term capital-gains rate of only fifteen percent (assuming present rates do not rise or fall).
Income tax relief when making the proper moves with your retirement accounts may be substantial.
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