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Apr 19, 2021 · If you withdraw the $100,000 of stock and sell it, you pay the ordinary tax rate only on $10,000. For the remaining $90,000, you instead pay long-term capital gains taxes.
Dec 4, 2023 · Unlike capital losses, non-capital losses can be applied to other income. If your small business venture resulted in a loss of $5,000, that loss can be applied to the income from your other sources such as employment, RRSP income, interest amounts, etc.
Company stock in your 401 (k) has special rules, specifically an available tax treatment called Net Unrealized Appreciation. Under the right circumstances, you pay only the capital gains...
Nov 14, 2023 · When company stock holdings in your 401 (k) are distributed, you must pay taxes on investment gains. A tax strategy known as net unrealized appreciation (NUA), when applied to company stock, can help you effectively pay lower capital gains rates on a portion of your tax-deferred assets instead of paying the typically higher ordinary income rates.
- By Robert Klein, CPA
- Company Stock Nua Exception
- Nua Test #1 – Triggering Event
- Nua Test #2 – Lump-Sum Distribution
- Complying with The Nua Exception
- Other Nua Benefits
- When Taking Company Stock Isn’T A Good Idea
- About The Author – Robert Klein
Distributions from a traditional 401(k) plan are generally taxable as ordinary income at your regular income tax rates. This includes pre-tax contributions plus earnings. If your traditional 401(k) plan is rolled over to a traditional IRA, the same rule applies when you withdraw funds from your IRA.
There’s an exception to this rule for highly appreciated company stock held in a 401(k) plan. Appreciation is the difference between the current value and the cost of the shares when they were put in the plan. Although you can roll over company stock from your 401(k)plan to an IRA, it generally isn’t advisable to do so if the stock is highly apprec...
There are two tests governing when you can apply the NUA exception. Test #1 is that the distribution must occur after any one of the following four triggering events: · Age 59-1/2 · Separation from service (not for self-employed) · Disability (only for self-employed) · Death Once one of the four triggering events occurs, the NUA exception applies i...
After the occurrence of one of the four triggering events, you must take a lump-sum distribution from your 401(k) plan. To qualify as a lump-sum distribution, (a) the distribution must occur in one tax year and (b) your 401(k) balance must be zero by the end of that year. NUA Example Let’s assume that Tom works for Tesla, he has a traditional 401(k...
As previously stated, there are strict rules governing when you can apply the NUA exception. Failure to comply with the rules will result in ordinary income vs. favorable long-term capital gain tax treatment on the unrealized appreciation of company stock held in a 401(k) plan. There are ten things to keep in mind to avoid unpleasant surprises, sev...
In addition to favorable long-term capital gains tax treatment on NUA, there are several other benefits that can be realized from engaging in a NUA transaction. These include the following: · Except for cost basis, highly appreciated stock held in a 401(k) plan won’t be taxable at ordinary income tax ratesin the future. · Today’s current low tax ra...
Taking a distribution of company stock from a 401(k) plan and complying with the NUA rules can result in significant income tax savings and other benefits when the stock is highly appreciated, i.e., its fair market value significantly exceeds its cost basis. Likewise, NUA transactions should be avoided whenever there’s either a high cost basis or t...
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Centerin Newport Beach, California. Bob is also the writer and publisher of Retirement Income Visions™, a blog featuring innovative strategies for creating and optimizing retirement income that Bob created in 2009. Bob applies his unique background, experie...
- 7 min
You'll have to pay ordinary income taxes on your 401(k) distributions, but here are some ways to try to avoid taxes on 401k withdrawals.
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Oct 25, 2024 · A traditional 401(k) withdrawal is taxed at your income tax rate. A Roth 401(k) withdrawal is tax-free.
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related to: are 401(k) plans tax-free business capital loss vs non dividend stock taxThis guide may be especially helpful for those with over $1M portfolios. If you have a $1,000,000 portfolio, download your free copy of this guide now!
