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A Tax-Advantaged Way to Distribute Employer Stock From Retirement Plans

Employees distributing their employer's stock from a retirement plan may be able to take advantage of a special tax treatment called net unrealized appreciation.

Clients retiring from large public companies may have significant amounts of their employer's stock as an asset in their retirement plans. For long-term employees, this stock may have enjoyed significant appreciation from the date of contribution. Provided the employer's retirement plan is a qualified plan under §401(a), such as pension, profit-sharing, 401(k), or stock-bonus plans, and the client takes a lump-sum distribution of the full balance due, the net unrealized appreciation distribution strategy may be appropriate.

This special tax treatment allows for capital gains treatment of any embedded appreciation, rather than having it taxed as ordinary income. If a few basic requirements are met, your client would be able to distribute the shares of stock in-kind from the retirement plan to a taxable brokerage account and pay ordinary income taxes on the stock's original tax basis. The tax basis is the value of the shares when they are deposited into the plan. This basis would be taxed at the client's marginal income rate in the year of distribution. The embedded appreciation in those shares (the fair market value as of the date of distribution less the tax basis), however, would be considered long-term capital gains. The gain from this approach would not be taxed until the shares are sold, which could be as soon as the day after distribution.

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