The Benefits of a NUA Tax Strategy with Brandon Baiamonte | Mission Wealth

hello my name is brandon bayamonti i am the director of tax strategy at mission wealth do you own your employer’s stock in your 401k plan has the stock increase significantly in value if so there is a tax strategy that can potentially reduce the amount of taxes you pay when you distribute the stock from your plan we will discuss this strategy today and explain when it might be appropriate to use some of us are able to purchase or receive stock in the company we work for is one of our 401k investment choices the difference between what we purchased the stock for and what it is currently worth is sometimes referred to as net enterprise appreciation or nua when we make a taxable distribution from our 401k plan we generally pay taxes on the entire distribution at ordinary income tax rates these rates can be as high as 37 percent under certain circumstances with employer stock we only need to pay ordinary income taxes on what we purchased to stop for our cost basis the gains or nua are then taxed at the lower long-term capital gains rate whenever we choose to sell it the maximum capital gains rate is 20 percent which is substantially lower than the highest ordinary income tax rate of 37 percent there are a few conditions that must be met in order to use this strategy we will discuss them in turn one in-kind distribution of stock you must transfer the stock directly from your 401k plan to a taxable brokerage account you can’t sell the stock in your 401k plan and then repurchase it in your taxable account you also can’t roll over your employer stock into an ira and then make the decision to distribute to a taxable account later on two lump sum distribution you must distribute your entire 401 k balance within one tax year you would generally need to make two different transfers you would open up a taxable brokerage account and transfer your employer stock into it you would then roll over the remainder of your 40k account into an ira you want to ensure your 401k balance is zero at the end of the year even a small balance in your 401k can be a problem it should be noted you don’t need to distribute all of your company’s stock into a taxable account you could transfer a portion of your employer stock into a taxable account and then roll over the remainder with all of your other investments into an ira it might make sense to only distribute your lowest basis shares to the taxable account three triggering an event there are four triggering events that enable you to use this strategy they are a death b disability c reaching age 59 and a half d separation from service with your employer if you meet these tests and you’re able to pay ordinary income tax rates on the amount you paid for the stock your cost basis and then pay long-term capital gains on the appreciate appreciation whenever you choose to sell should you use this strategy well it depends this strategy works best when the current value of the stock is significantly higher than what you paid for it you’ll also want to look at the tax bracket you are in now and compared to the likely tax bracket you’ll be in when you make distributions from your 401k plan or ira this strategy might seem complicated but can reduce your taxes significantly in some circumstances at mission wealth we help you explore the most cost effective solutions to help cover a number of possibilities we are fiduciary for our clients and have no proprietary products to sell and no quotas to fill we simply offer independent objective advice that serves your best interests we offer experience and resources that could help create a total coordinated picture our advisors can provide objective advice that aligns your financial position with your biggest dreams and aspirations our tax management services include estate tax reduction strategies an annual tax management review concentrated stock planning as well as integration and coordination with your cpa on tax savings strategies you can find more information by visiting mission wealth dot com backslash tax management your client advisor at mission wealth is available to help coordinate with your tax advisor and is a great resource to help plan for and implement this and other strategies if you don’t have an advisor but like to learn more you can contact us by phone or via our website and advisor will be in touch please visit www.missionwealth.com to learn more thanks for watching i’m brandon bayamonti director of tax strategy at mission wealth and in this video we discuss the tax implications of an nua we hope you have a great day stay tuned for our next episode in this tax series which explores roth conversions you