Company Stock Distribution Analysis
If you own company stock in a retirement plan, you may be able to take advantage of the long-term capital gains tax rate rather than your ordinary income tax rate on this investment. Normally all earnings withdrawn from a retirement plan are taxed as ordinary income, at ordinary income tax rates. However, if you take an in-kind distribution of your employer's company stock from your retirement plan to a taxable investment account, you may be able to take advantage of a special set of rules that allow you to pay only capital gains taxes on a significant portion of the distribution. Use this calculator to see how such a distribution might benefit your retirement nest egg.
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Distribution analysis inputs: |
Estimated Tax on Distributions* |
Definitions
General assumptions
- Taxes, which are due as a result of the distribution of company stock from a retirement plan to a taxable account, will be paid from outside sources. In other words, a portion of the company stock is not sold to obtain the money necessary to pay the taxes.
- The entire distribution consists of company stock.
- The distribution qualifies as a "lump sum distribution." A lump sum distribution is defined in the Internal Revenue Code as the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind (e.g., pension, profit sharing, or stock bonus plans). The qualifying events that allow distributions are separation from service, permanent disability, death or after an employee attains age 59-1/2.
Net unrealized appreciation (NUA)
NUA is the excess of the fair market value (FMV) of your company stock at the time of the distribution over its cost basis to the qualified plan's trust. This amount will be taxed when you eventually sell the stock in your taxable account. If you take a taxable, in-kind distribution of your company stock, your NUA is treated as a long-term capital gain, even if you sell your stock immediately after the distribution. Please note that any appreciation above the FMV of the stock that occurs after your distribution from the plan, will be considered a short-term capital gain if you liquidate your company stock within one year of the distribution date. If the stock is held for at least one year after the distribution date, it is then characterized as a long-term capital gain.
If you roll over your company stock to an IRA, rather than taking it as a currently taxable, in-kind distribution, the NUA will be subject to taxation at the ordinary income rates, rather than capital gains rates, when it is subsequently withdrawn from the IRA.
Present Value
The amount that a future sum of money is worth today based on an assumed inflation rate. By discounting future tax distributions to present values, comparisons between alternatives are placed on a common basis.
Balance at time of distribution
This is the fair market value (FMV) of the company stock, which will be distributed from your retirement plan.
Total stock purchases (cost basis)
This is the total amount you and/or your employer paid for the stock that is being distributed. This is also referred to as the company stock's 'cost basis'. Your retirement plan administrator is required to provide you with the amount of your cost basis. When you request an in-kind distribution of company stock to a taxable account and use the NUA strategy, instead of rolling it to an IRA, you pay taxes at your marginal income tax rate on the cost basis of the stock. This means that if the fair market value (FMV) of the company stock shares within your 401(K) is $1,000, and the total purchase price is $200 (your cost basis), you would only initially pay taxes on the $200 cost basis. The cost basis is usually taxed as ordinary income. Unless you qualify for an exception, there may be a 10% penalty tax on the cost basis; the two most common exceptions are:
- You are at least age 59-1/2 at the time of the distribution
- You separate from service, from the employer providing the retirement plan, in or after the year in which you attained age 55
Rate of return
This is the expected rate of return on your company stock. This is only used to help project your future account balance and subsequent taxes. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.
Holding period
The number of years and months you expect to hold onto the company stock after you have taken the distribution.
Capital gains rate
This is the tax rate you expect to pay on any long-term capital gains. Long-term capital gains are taxed at lower, special capital gains rates and are calculated as follows (note that qualified dividends are taxed as if they were a long-term capital gain):
- Calculate your total taxable income without long-term capital gains.
- Use this amount to determine the rate for your long-term gain, up to the top of the bracket.
- The portion of your long-term capital gain that exceeds a bracket will be taxed at the next higher rate.
- This calculator assumes that none of your long-term capital gains come from collectibles, section 1202 gains or un-recaptured 1250 gains. These types of capital gains are taxed at 28%, 28% and 25% respectively (unless your ordinary income tax bracket is a lower rate).
Tax Rate | Married Filing Jointly or Qualified Surviving Spouse | Single | Head of Household | Married Filing Separately |
---|---|---|---|---|
0% | $0 - $94,050 | $0 - $47,025 | $0 - $63,000 | $0 - $47,025 |
15% | $94,050 - $583,750 | $47,025 - $518,900 | $63,000 - $551,350 | $47,025 - $291,850 |
20% | Over $583,750 | Over $518,900 | Over $551,350 | Over $291,850 |
*Caution: Do not use these tax rate schedules to figure 2023 taxes. Use only to figure 2024 estimates. Source: Rev. Proc. 2023-34 |
Marginal income tax rate
This is the tax rate used to determine taxes on your taxable income. Use the table below to help you determine your marginal income tax rate. Use the ‘Filing Status and Federal Income Tax Rates on Taxable Income’ table to assist you in estimating your Federal tax rate.
Tax Rate | Married Filing Jointly or Qualified Surviving Spouse | Single | Head of Household | Married Filing Separately |
---|---|---|---|---|
10% | $0 - $23,200 | $0 - $11,600 | $0 - $16,550 | $0 - $11,600 |
12% | $23,200 - $94,300 | $11,600 - $47,150 | $16,550 - $63,100 | $11,600 - $47,150 |
22% | $94,300 - $201,050 | $47,150 - $100,525 | $63,100 - $100,500 | $47,150 - $100,525 |
24% | $201,050 - $383,900 | $100,525 - $191,950 | $100,500 - $191,950 | $100,525 - $191,950 |
32% | $383,900 - $487,450 | $191,950 - $243,725 | $191,950 - $243,700 | $191,950 - $243,725 |
35% | $487,450 - $731,200 | $243,725 - $609,350 | $243,700 - $609,350 | $243,725 - $365,600 |
37% | Over $731,200 | Over $609,350 | Over $609,350 | Over $365,600 |
*Caution: Do not use these tax rate schedules to figure 2023 taxes. Use only to figure 2024 estimates. Source: Rev. Proc. 2023-34 |
Expected inflation rate
This is what you expect for the average long-term inflation rate. A common measure of inflation in the U.S. is the Consumer Price Index (CPI). From 1925 through 2023 the CPI has a long-term average of 3.0% annually. Over the last 40 years the highest CPI recorded was 13.5% in 1980. For 2023, the last full year available, the CPI was 3.1% annually as reported by the U.S. Bureau of Labor Statistics.
Separated from Service At Age 55 or Older
Check this box if you separated from service, from the employer providing the retirement plan, in the year you attained age 55 or later. Under these circumstances, there would be no 10% penalty tax on the distribution from the retirement plan.
Retirement Plan Distribution Will Be At Age 59-1/2 or Older
Check this box if the retirement plan distribution from the retirement plan will occur on or after the date you reach age 59-1/2. Under these circumstances there would be no 10% penalty tax on this, or any future distributions from the retirement plan or IRA.
IRA Distribution Will Be At Age 59-1/2 or Older
Check this box if the distribution from the IRA will occur on or after you reach age 59-1/2. Under these circumstances, there would be no 10% penalty tax on the distribution.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. The performance mentioned does not include fees and charges which would reduce an investor returns. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. Fixed income risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration.