Broker Check

Pre-Retirement Stock Strategies

Do you own any of your employer’s company stock inside your employer’s 401(k), ESOP, profit sharing plan, or other retirement plan?

Has it gone up in value since you got it? If so, you should start thinking about what to do with the stock when you retire or leave your employer. Your decision can have big tax consequences.

Most people roll company stock into an IRA when they retire or leave. When you do this, no tax is due.

But there’s a downside: when you later sell the stock, you’ll have to pay tax on the proceeds at ordinary income tax rates, which can be as high as 37 percent (and could be going higher).

You have another alternative: electing net unrealized appreciation (NUA) treatment for your company stock. This way, whenever you sell the stock, you pay tax on your NUA at long-term capital gains rates, which are 15 percent for most people.

The tradeoff: you have to pay tax on your tax basis in the stock at ordinary income rates for the year you transfer it. You may also have to pay the 10 percent early withdrawal penalty on your shares’ cost basis if you take your lump-sum distribution before reaching age 59 1/2.

Any additional appreciation in the stock at the time of sale also receives capital gains treatment—it will be taxed at the long-term capital gains rate if you hold the stock for more than one year from the distribution date.

To qualify for NUA treatment, you must transfer all your vested employer retirement plan assets as part of a lump-sum distribution made after you reach age 59 1/2, leave your employer, or die.

Because the stock is not in a retirement plan, it is not subject to the required minimum distribution rules. You can keep it in your account until you die. Your heirs then get a stepped-up basis above the NUA amount for the appreciation in the stock during the time you held it in your taxable account. 

Net unrealized appreciation treatment isn’t for everyone. It works best for older employees who have substantial appreciation in their company stock and want the money soon while paying the lowest taxes. 

If you have any questions or need my assistance with this or any matter, please call me on my direct line at (805)388-0044.