Company Stock Could Be Taxing Your IRA

You could be creating an extra amount of tax if you roll the stock into the IRA. When you take the stock out of the IRA, you will pay taxes at your ordinary income tax rates on the market value as of the date of distribution. You do not get to use the capital gains rate.

Back to our example of $50,000:

• Original cost basis: $15,000 taxed at 28%: $4,200

• Appreciation: $35,000 taxed at 15%: $5,250

• Total tax: $9,450

If the stock grew to $100,000:

• Original basis: $15,000 taxed at 28%: $4,200

• Appreciation: $85,000 taxed at 15%: $12,750

• Total tax: $16,950

If, instead of taking an immediate distribution of the stock, you rolled it into the IRA, there would be no tax initially. However, when the stock is distributed from the IRA, it will be taxed at ordinary income tax rates. In our illustration, the total tax on $100,000 would be $28,000, assuming a 28% ordinary tax rate.

In our examples involving that $50,000 investment that grows to $100,000, the decision to roll it into an IRA is a costly one:

• Taxes using NUA strategy: $16,950

• Taxes after rolling stock over to IRA: $28,000

• Additional cost: $11,050

In this example, you would have saved $11,050 by not rolling the stock into the IRA.

Incidentally, if you chose to have the company stock distributed instead of rolling it over, you must take the stock distribution in the same tax year as the IRA rollover.

Now that companies cannot force an employee to load up excessively on company stock, the issue of net unrealized appreciation is not as big as it used to be. Regardless of the amount of stock, you may still benefit from using this strategy.

Always coordinate this strategy with your accountant to make sure you are running the numbers accurately. For an IRS Code reference, please see IRS 402 (e)(4)(E).