Broker Check

Monday Money Report

| May 03, 2021

Last week we saw the S&P 500 set two new record highs before declining on Friday. For the month of April, the market was still up about 5%. So far, reported earnings for S&P 500 companies are nearly double what was expected. Earnings season continues next week as remaining companies report their quarterly earnings.

We’ve spent the last few weeks discussing stock options and grants, as well as Employee Stock Purchase Plans.  Another impact of company stock can occur when you own company stock inside your 401(k) or other employer-sponsored retirement plan. There are some unique tax advantages under the rules of Net Unrealized Appreciation, or NUA.

Remember that distributions from your traditional retirement accounts are taxed as ordinary income, whereas gains on investments held in non-retirement accounts are taxed at capital gains rates.  Capital gains tax rates are currently lower than ordinary income tax rates, so receiving capital gains tax treatment saves tax dollars.

NUA treatment allows you to pay ordinary income taxes on the cost basis of employer stock in your retirement plan, and capital gains taxes on the gain.  For example, George retires from Spacely Sprockets with $500,000 of company stock in his portfolio.  At the time the stock was added to his 401(k), it was worth $250,000.  George has a choice to make. He can just treat all of that like any other 401(k), taking distributions as needed to finance his retirement, and paying ordinary income taxes on each distribution.

George can also choose to move any amount of that stock out of his retirement account under NUA rules.  If he moved the entire amount, he would pay ordinary income taxes on the cost basis, or what he paid for the stock, $250,000. The remaining $250,000 would be treated as capital gains and taxed when he sold the stock.

The huge advantage here is significantly lower taxes on all of the unrealized gains. The downside is that the full amount of the cost basis is taxed as ordinary income in the year you transfer it.  The NUA rules work well when you have highly-appreciated company stock, meaning you have a low cost basis and high market value.

There are also several rules you have to follow to receive NUA treatment.  You must be separated from your employer, reached the minimum retirement age for distribution, have become disabled, or passed away. You also have to distribute or rollover the entire amount of the 401(k) within one year.

In addition, it is worthwhile to consider how much employer stock you want to own as a percentage of your net worth.

If your company pays part or all of the match in your retirement plan with company stock, or you have the option to purchase employer stock in your plan, it can be worthwhile to discuss NUA options with an advisor and your tax professional, as well as the actions you take when you leave the company. I strongly believe that tax avoidance is every American’s civic duty.

Your action to take this week is to consider funding last year’s IRA or Roth IRA. You have until May 15th to do so.  If you’re under 50, you can contribute up to $6,000.  Once you hit the half-century mark, you can contribute an extra $1,000, for a total of $7,000. Even if you make too much to contribute to a deductible IRA, you still have options that are worth exploring.

More resources and information, including our calendar of educational events, are available on our website at and on our Facebook page. 

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.