Catherine M. Censullo CPA
One Minute Tax Tip


I always like to plan ahead to avoid any surprises.  Do you feel that way too?  Retirement is one of those big things that needs considerable planning.

When retirement time approaches, you have so many things to think about.  Planning your new lifestyle, planning for managing your finances once your paycheck stops, thinking about the things you will do with the extra time on your hands, and many others as well.

One of the things people often do when they retire is roll their pension plan over to an IRA account.  But before you do, there is something you should consider before it is too late to take advantage of it.

Do you own company stock in your 401(k) or ESOP plan?  Has the value gone up considerably since you began to purchase it in your company plan?

If the answer to both questions is "yes", there is something you can do that may provide you a considerable tax benefit that you probably didn't know about.

There is a little-known rule in the tax code called net unrealized appreciation (NUA).  It allows you to take the stock in your company plan and transfer the shares to a taxable account while only paying the tax as ordinary income on the cost basis of the stock purchased, not its full market value. 

Then, at some future date, when you decide to sell the shares, you will pay tax at the lower capital gains rate on the net unrealized appreciation, the difference between their cost basis, for which you already paid ordinary income tax, and the market value at the time you sell them.

If instead you transferred these shares directly to your IRA account, you would pay tax at the higher ordinary income tax rates on the full market value of the shares distributed.  You would lose the benefit of the NUA rules.

But these rules are not so simple, as there are many other conditions that have to be satisfied to make this happen. 

First of all, you must take an entire lump-sum distribution within the same calendar year.  If you transfer the remaining amount of your plan to an IRA account, this is considered a lump sum distribution.

Second of all, your distribution must occur after a triggering event such as:

  • separation of service from your employer (as long as you are not self-employed),
  • attainment of age 59 1/2, death, or
  • disability (only if you are self-employed). 

Thirdly, you cannot take any distributions from your plan between the triggering event and the year of the lump sum distribution.  For example, be aware that if you do an in-plan Roth conversion, this is considered to be a distribution.

If you think you may be a candidate to consider this option, make sure you get advice from a competent advisor who is familiar with all the rules.

You may also have other tax considerations to evaluate such as the 10% early withdrawal penalty if you are below age 59 1/2.

So make sure you get competent advice before pursuing this strategy.  But you could qualify for significant tax savings with the right set of circumstances.

Feel free to pass this on to someone who may benefit from this information.

If you want to discuss your personal situation in more detail or look at the impact of changes in your life, alternatives that you are considering, or the impact of taking deductions this year vs. next year, don't hesitate to contact the office to set up an appointment.


Catherine M. Censullo, CPA

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