April 2008 Newsletter--p.2
...From Leigh
Net Unrealized Appreciation
By: Gregory Matthews, CFP®, CFS
As we begin the year, an important planning consideration for many of your retiring clients
could be the use of net unrealized appreciation (NUA). Below is a primer on NUA and it is
important to remember that it must be a lump sum distribution completed within one plan
year. Therefore, clients retiring in 2007 should be presented with NUA as an option for
retirement distributions (in addition to traditional IRA rollover strategies). There are many
potential pitfalls while implementing the NUA strategy, please consult with a retirement
distribution specialist prior to execution.
At retirement, many retirees will choose to rollover their qualified plan balance to an Individual
Retirement Account (IRA). However, for retirees who own employer securities inside their
retirement plans, an IRA rollover might not be the best option. These individuals should
consider taking a distribution of the securities using Net Unrealized Appreciation (NUA).
A retiree has four options for handling employer securities:
1. Keep the plan intact (retain securities in the plan)
2. Utilize an IRA via a tax-free rollover (trustee to trustee transfer)
3. Take 100% of securities out via a lump-sum distribution
4. Use an IRA rollover for a portion of the funds while taking the remaining employer
securities out via a lump-sum distribution.
In order to perform steps (3) or (4) you must first understand what is meant by a lump-sum
distribution. A lump sum distribution is the total distribution, within one plan year (generally a
calendar year), of all the plan participant’s assets. Generally when you take a distribution
from a qualified plan, it is subject to ordinary income tax rates that range from 10% to 35%,
depending on your taxable income for that year. However, there are special situations, i.e.
distribution of employer securities from qualified plans, which receive special tax treatment.
When the distribution is company stock, this special tax treatment includes an allowance to
pay tax at the capital gains rate instead of the ordinary income tax rate on a portion of the
distribution. This could be the difference of paying tax at 35% (income tax rates) versus 15%
(capital gains)!
When using NUA, you are only required to pay income tax on the portion of distribution that is
taxable in the year distributed. This is the cost basis of the employer securities and any other
assets (i.e. cash) not rolled over to an IRA or another qualified plan. The cost basis is the
amount the plan paid to purchase the securities and will be provided by the plan
administrator upon request.
Any appreciation in the employer securities from the purchase date until the distribution date
(NUA) is not taxable at the time of distribution. The NUA portion will not be taxable until the
securities are sold at which time it will receive capital gains tax rates.
The capital gains treatment is a key benefit of using NUA.
Example: Mr. Doe at 65, receives a share of ABC Corp stock (company stock) from his
employer-qualified plan that is currently trading at $200. The cost basis in the ABC Corp
stock is $20. The difference of $180 between the current trading price ($200) and the cost
basis ($20) represents NUA. Only $20 of the cost basis is subject to taxation at the ordinary
income tax rates in the year of distribution. The $180 NUA will not be taxed until the year the
stock is sold. Note: If you are under the age of 55 at time of distribution, you will be subject
to a 10% early withdrawal tax on the taxable portion (cost basis of employer securities).
Other benefits of NUA include:
· The ability to transfer the stock to another individual for estate tax planning
· Transfer of stock retains the donors cost basis for the donee who receives the stock.
· Charitable planning with Charitable Remainder Unitrust (CRTs) is not only viable, but
extremely popular
· Diversification is possible as well as hedging strategies which cannot be used within a
qualified plan (i.e. puts and calls, variable forward contracts, and CRTs
· NUA is also available to the beneficiaries if the qualified account owner died while
his/her assets were still in the plan.
While using NUA (in lieu of an IRA rollover) provides a significant planning option, you should
consult with an expert before attempting. There many special planning considerations that
should addressed as well as illustrations and comparisons of the various options. Any
missteps may invalidate NUA as an option (i.e. rollover of company stock from qualified plan
to an IRA - can no longer use NUA as an option). We will be glad to assist you and/or your
clients in running illustrations and discussing the many benefits of using NUA planning. In
addition, we will walk you through each step to ensure it is setup and performed properly.
Please give us a call at (972) 620-1822 to discuss you or your clients’ personal situations.
As federal and state tax rules are subject to frequent changes, you should consult with a
qualified tax advisor prior to making any investment purchase decisions.
The information presented does not consider your particular investment objectives or
financial situation and does not make personalized recommendations. This information
should not be construed as an offer to sell or a solicitation of an offer to buy any security.
The investment strategies may not be suitable for you. We believe the information provided is
reliable, but do not guarantee its accuracy, timeliness, or completeness. Any opinions
expressed herein are subject to change without notice. Past performance is not a guarantee
of future results.
Gregory Matthews, CFP®, CFS
Investment Adviser Representative
(972) 620-1822.
...From Leigh
Net Unrealized Appreciation
By: Gregory Matthews, CFP®, CFS
As we begin the year, an important planning consideration for many of your retiring clients
could be the use of net unrealized appreciation (NUA). Below is a primer on NUA and it is
important to remember that it must be a lump sum distribution completed within one plan
year. Therefore, clients retiring in 2007 should be presented with NUA as an option for
retirement distributions (in addition to traditional IRA rollover strategies). There are many
potential pitfalls while implementing the NUA strategy, please consult with a retirement
distribution specialist prior to execution.
At retirement, many retirees will choose to rollover their qualified plan balance to an Individual
Retirement Account (IRA). However, for retirees who own employer securities inside their
retirement plans, an IRA rollover might not be the best option. These individuals should
consider taking a distribution of the securities using Net Unrealized Appreciation (NUA).
A retiree has four options for handling employer securities:
1. Keep the plan intact (retain securities in the plan)
2. Utilize an IRA via a tax-free rollover (trustee to trustee transfer)
3. Take 100% of securities out via a lump-sum distribution
4. Use an IRA rollover for a portion of the funds while taking the remaining employer
securities out via a lump-sum distribution.
In order to perform steps (3) or (4) you must first understand what is meant by a lump-sum
distribution. A lump sum distribution is the total distribution, within one plan year (generally a
calendar year), of all the plan participant’s assets. Generally when you take a distribution
from a qualified plan, it is subject to ordinary income tax rates that range from 10% to 35%,
depending on your taxable income for that year. However, there are special situations, i.e.
distribution of employer securities from qualified plans, which receive special tax treatment.
When the distribution is company stock, this special tax treatment includes an allowance to
pay tax at the capital gains rate instead of the ordinary income tax rate on a portion of the
distribution. This could be the difference of paying tax at 35% (income tax rates) versus 15%
(capital gains)!
When using NUA, you are only required to pay income tax on the portion of distribution that is
taxable in the year distributed. This is the cost basis of the employer securities and any other
assets (i.e. cash) not rolled over to an IRA or another qualified plan. The cost basis is the
amount the plan paid to purchase the securities and will be provided by the plan
administrator upon request.
Any appreciation in the employer securities from the purchase date until the distribution date
(NUA) is not taxable at the time of distribution. The NUA portion will not be taxable until the
securities are sold at which time it will receive capital gains tax rates.
The capital gains treatment is a key benefit of using NUA.
Example: Mr. Doe at 65, receives a share of ABC Corp stock (company stock) from his
employer-qualified plan that is currently trading at $200. The cost basis in the ABC Corp
stock is $20. The difference of $180 between the current trading price ($200) and the cost
basis ($20) represents NUA. Only $20 of the cost basis is subject to taxation at the ordinary
income tax rates in the year of distribution. The $180 NUA will not be taxed until the year the
stock is sold. Note: If you are under the age of 55 at time of distribution, you will be subject
to a 10% early withdrawal tax on the taxable portion (cost basis of employer securities).
Other benefits of NUA include:
· The ability to transfer the stock to another individual for estate tax planning
· Transfer of stock retains the donors cost basis for the donee who receives the stock.
· Charitable planning with Charitable Remainder Unitrust (CRTs) is not only viable, but
extremely popular
· Diversification is possible as well as hedging strategies which cannot be used within a
qualified plan (i.e. puts and calls, variable forward contracts, and CRTs
· NUA is also available to the beneficiaries if the qualified account owner died while
his/her assets were still in the plan.
While using NUA (in lieu of an IRA rollover) provides a significant planning option, you should
consult with an expert before attempting. There many special planning considerations that
should addressed as well as illustrations and comparisons of the various options. Any
missteps may invalidate NUA as an option (i.e. rollover of company stock from qualified plan
to an IRA - can no longer use NUA as an option). We will be glad to assist you and/or your
clients in running illustrations and discussing the many benefits of using NUA planning. In
addition, we will walk you through each step to ensure it is setup and performed properly.
Please give us a call at (972) 620-1822 to discuss you or your clients’ personal situations.
As federal and state tax rules are subject to frequent changes, you should consult with a
qualified tax advisor prior to making any investment purchase decisions.
The information presented does not consider your particular investment objectives or
financial situation and does not make personalized recommendations. This information
should not be construed as an offer to sell or a solicitation of an offer to buy any security.
The investment strategies may not be suitable for you. We believe the information provided is
reliable, but do not guarantee its accuracy, timeliness, or completeness. Any opinions
expressed herein are subject to change without notice. Past performance is not a guarantee
of future results.
Gregory Matthews, CFP®, CFS
Investment Adviser Representative
(972) 620-1822.
