Withdrawing company stock from your 401(k) can give you a tax break, but isn’t a great deal, analysis shows.

A tax break called net unrealized appreciation “sounds like a slam-dunk,” says Bob DiQuollo, President of Brinton Eaton, a Madison, NJ-based wealth advisory firm, “but when you do the numbers, it hardly ever pays off.”

NUA gives you a tax break when you remove company stock from your 401(k) plan.  The cost (basis) of the stock counts as ordinary taxable income.  When you sell the stock, any additional appreciation is taxed at the long-term capital-gains tax rate.

So, if your stock cost $5,000 and is now worth $50,000, you’ll have $5,000 in ordinary income and a $45,000 long-term gain.  However, if you roll over the stock into an IRA, the entire amount will be counted as ordinary income when you withdraw it during retirement.

But DiQuollo’s analysis shows that almost everyone who doesn’t need to withdraw money before age 70 ½ is better off doing a rollover and letting tax-deferred compounding work.

He does an apples-to-apples comparison by “selling” the stock, paying the tax and assuming a realistic after-tax rate of return over time.  He then compares that result with rolling over shares into an IRA, selling them inside the IRA and paying the tax on mandatory annual withdrawals starting at age 70½.

“About 95% of the time you’ll have more money at the end of the period by rolling your shares into your IRA,” he says.  “With NUA, you pay an immediate income tax, both federal and state, which reduces the value of your asset.  And that’s very hard to overcome.”

If you must have the money to cover ordinary living expenses or want to do something important with it, like buying a second home, taking advantage of NUA can make sense, DiQuollo says. But for most people, net unrealized appreciation is a net loser.

About Brinton Eaton
Based in Madison, NJ, Brinton Eaton is a boutique advisory firm with a long history of serving affluent individuals and their families across multiple generations. The firm helps its clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs, and retirees with investable assets over $2 million. For more information, visit www.brintoneaton.com.