My company stock inside of my 401(k) is down in value this year. Is there anything I can do to stop the bleeding?
This is an important potential tax-savings opportunity for those with company stock in their employer plan. Author: Andy Spears, CFP®
You personally can’t do much about the value of your company stock, or any stock for that matter. However, if you own company stock inside of your 401(k), there is a strategy available to you if suitable called Net Unrealized Appreciation (NUA), which leads us to a discussion about Net Unrealized Depreciation (NUD). Here’s how it works.
When you purchase company stock inside of your 401(k), whatever you pay for it is your cost basis. So, if you purchase 10 shares of company stock inside your 401(k) worth $10 a share, your cost basis is $10 for each of those shares for a total cost basis of $100. Now, fast forward 10 years and let’s say your company stock is worth $100 per share. You have $1,000 worth of company stock, but your cost basis is still $100. The difference between what you paid for the stock and the value of the stock today is called your Net Unrealized Appreciation (NUA). In this case your NUA is a total of $900.
Uncle Sam allows you to distribute your company stock to a taxable investment account and pay ordinary income taxes on only the cost basis ($100 in this example). The NUA portion of your stock, ($900 in this example) is taxed at the more attractive long-term capital gains rates.
With NUA, when you distribute the stock, you are required to pay ordinary income tax on only the cost basis of the stock. This is where NUD or “resetting your cost basis” comes into play. If the value of your employer stock is down this year, it might be a good time to “re-set” the cost basis of your stock inside that plan in-order to have a lower cost basis, thus paying less ordinary income tax in the future if you decide to utilize NUA. This means you would sell your company shares inside if your retirement account and repurchase them back immediately.
Again you might ask yourself - why do this? A bigger gap between the cost basis — what you paid for the stock — and the potential growth from that point forward creates more opportunity to apply the NUA rule in the future. This strategy may be particularly important now given the stock market volatility we’ve seen lately. If you have employer stock in your company retirement plan, consider reviewing the cost basis versus the current market price. If the current stock price is lower than your cost basis, that may be an opportunity to apply this strategy – selling the stock and immediately buying back within the plan to step down and reset the cost basis.
Be sure to check with your plan administrator prior to implementing either the NUA or the NUD strategy to ensure your plan allows it. There are many considerations to implementing the NUA strategy and ultimately making a decision comes down to your personal circumstance. On the other hand, “resetting” the cost basis is a much simpler decision to make. You are only resetting your cost basis – which in turn will set you up for a more attractive opportunity to choose the NUA election upon retirement. It’s easy to calculate the tax benefits of choosing NUA strategy, but what’s more important is that you understand the pros and cons of the strategy, and the effect it may have on your overall financial planning. Talk with a professional to help guide you in the decision-making process and to determine if this strategy is right for you or suitable for you.
How about you? Does this strategy make sense for you? Is C&C Wealth right for you? Click below to contact us and get in touch. No Cost No Obligation.
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Andy Spears and not necessarily those of Raymond James.
Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal tax penalty.
Prior to making an investment decision, please consult with your financial advisor about your individual situation.
