- General assumptions
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- Taxes, which are due as a result of the distribution of company stock from a retirement plan to a taxable account, will be paid from outside sources. In other words, a portion of the company stock is not sold to obtain the money necessary to pay the taxes.
- The entire distribution consists of company stock.
- The distribution qualifies as a "lump sum distribution." A lump sum distribution is defined in the Internal Revenue Code as the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind (e.g., pension, profit sharing, or stock bonus plans). The qualifying events that allow distributions are separation from service, permanent disability, death or after an employee attains age 59-1/2.
- Net unrealized appreciation (NUA)
- NUA is the excess of the fair market value (FMV) of your company stock at the time of the distribution over its cost basis to the qualified plan's trust. This amount will be taxed when you eventually sell the stock in your taxable account. If you take a taxable, in-kind distribution of your company stock, your NUA is treated as a long-term capital gain, even if you sell your stock immediately after the distribution. Please note that any appreciation above the FMV of the stock that occurs after your distribution from the plan, will be considered a short-term capital gain if you liquidate your company stock within one year of the distribution date. If the stock is held for at least one year after the distribution date, it is then characterized as a long-term capital gain.
If you roll over your company stock to an IRA, rather than taking it as a currently taxable, in-kind distribution, the NUA will be subject to taxation at the ordinary income rates, rather than capital gains rates, when it is subsequently withdrawn from the IRA.
- Present Value
- The amount that a future sum of money is worth today based on an assumed inflation rate. By discounting future tax distributions to present values, comparisons between alternatives are placed on a common basis.
- Balance at time of distribution
- This is the fair market value (FMV) of the company stock, which will be distributed from your retirement plan.
- Total stock purchases (cost basis)
- This is the total amount you and/or your employer paid for the stock that is being distributed. This is also referred to as the company stock's 'cost basis'. Your retirement plan administrator is required to provide you with the amount of your cost basis. When you request an in-kind distribution of company stock to a taxable account and use the NUA strategy, instead of rolling it to an IRA, you pay taxes at your marginal income tax rate on the cost basis of the stock. This means that if the fair market value (FMV) of the company stock shares within your 401(K) is $1,000, and the total purchase price is $200 (your cost basis), you would only initially pay taxes on the $200 cost basis. The cost basis is usually taxed as ordinary income. Unless you qualify for an exception, there may be a 10% penalty tax on the cost basis; the two most common exceptions are:
- You are at least age 59-1/2 at the time of the distribution
- You separate from service, from the employer providing the retirement plan, in or after the year in which you attained age 55
Please consult with your tax advisor for more details. - Rate of return
- This is the expected rate of return on your company stock. This is only used to help project your future account balance and subsequent taxes. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.
- Holding period
- The number of years and months you expect to hold onto the company stock after you have taken the distribution.
- Capital gains rate
- This is the tax rate you expect to pay on any long-term capital gains. **TAXCAPGAINS_CURRENT_DEFINITION**
- Marginal income tax rate
- This is the tax rate used to determine taxes on your taxable income. Use the table below to help you determine your marginal income tax rate. **TAXTABLE_CURRENT_DEFINITION**
- Expected inflation rate
- This is what you expect for the average long-term inflation rate. A common measure of inflation in the U.S. is the Consumer Price Index (CPI). From 1925 through 2023 the CPI has a long-term average of 3.0% annually. Over the last 40 years the highest CPI recorded was 13.5% in 1980. For 2023, the last full year available, the CPI was 3.1% annually as reported by the U.S. Bureau of Labor Statistics.
- Separated from Service At Age 55 or Older
- Check this box if you separated from service, from the employer providing the retirement plan, in the year you attained age 55 or later. Under these circumstances, there would be no 10% penalty tax on the distribution from the retirement plan.
- Retirement Plan Distribution Will Be At Age 59-1/2 or Older
- Check this box if the retirement plan distribution from the retirement plan will occur on or after the date you reach age 59-1/2. Under these circumstances there would be no 10% penalty tax on this, or any future distributions from the retirement plan or IRA.
- IRA Distribution Will Be At Age 59-1/2 or Older
- Check this box if the distribution from the IRA will occur on or after you reach age 59-1/2. Under these circumstances, there would be no 10% penalty tax on the distribution.
