What is Net Unrealized Appreciation?

QUESTION: CAN I AVOID TAXATION ON THE APPRECIATION OF MY COMPANY STOCK?

NET UNREALIZED APPRECIATION (NUA)

Money you make on the appreciation of an asset over time is called capital gains. Those gains are measured by the price the stock is sold for, minus the original purchase price of the stock when acquired. If your 401(k) plan holds stock from your employer and that stock appreciates over time, its fair market value will be considerably higher than its cost basis when you retire. The difference in the value of the stock from the time of purchase to the time of withdrawal is called Net Unrealized Appreciation.

A SPECIAL TAX BREAK

Special tax rules regarding NUA allow you to withdraw company stock from your retirement plan, retain ownership of the stock, and pay ordinary income tax on the acquisition price rather than its fair market value at the time of distribution.

WHAT HAPPENS WHEN I SELL THOSE SHARES?

Should you choose to sell the shares, you pay the long-term capital gains tax rate in effect on the appreciation and the applicable capital gains rate on any additional appreciation since distribution.

OUR ATS EXPERTS CAN EXPLAIN OTHER STIPULATIONS IN THE CODE INVOLVING NUA:

• To qualify for the break, you must take the entire pension plan account balance in a lump-sum distribution over the course of one tax year.
• Dividends paid on the stock are not tax-deferred.
• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your America’s Tax Solutions retirement distribution specialist can describe for you how this strategy works, and how it may affect you and your heirs.

See-Through Trusts

What is a “see-through” trust? Sometimes referred to as a “look-through” trust, it is essentially a trust drafted in a way that permits an IRA custodian to distribute RMDs from an inherited IRA based on the oldest trust beneficiary’s life expectancy. This type of trust is important to understand if you plan to name a trust as the beneficiary of your IRA or other qualified plan.

Under IRS rules, a trust is not a person and, therefore, cannot be a designated beneficiary. Why is this an important rule to understand? It’s important because many people (including some estate planning attorneys) do not understand that naming a trust as the beneficiary of your IRA eliminates the opportunity for individual trust beneficiaries to use a Multi-Generational IRA strategy.

A trust will qualify as “see-through” if all of the following elements are met:

1. The trust is valid under state law.

2. The trust is irrevocable or becomes irrevocable upon the death of the owner.

3. The trust beneficiaries are individuals who are identifiable.

4. All trust documents have been provided to the IRA custodian by October 31st of the year following the year of the owner’s death including:

a. A list of all beneficiaries including contingent and remaindermen.

b. Trust certification and certification that the beneficiary list is correct.

c. If the trust is amended, corrected certifications that change any information previously certified.

d. An agreement to provide the custodian a copy of the trust instrument upon demand.

Even if your trust qualifies as see-through under IRS rules, the trust beneficiaries may be treated as designated for IRA distribution purposes. But, at best, the trust beneficiaries cannot use their individual life expectancies to receive required minimum distributions and they are stuck using the life expectancy of the oldest trust beneficiary. IRS Publication 590 clearly states that “The separate account rules cannot be used by beneficiaries of a trust.”

Roth vs. Traditional IRA: Features and Distinctions

The primary difference between a Roth and Traditional IRA is that the funds in a traditional IRA grow tax-deferred, while the funds in a Roth IRA grow income tax-free. Contributions you make to a traditional IRA are taxed upon withdrawal. Roth IRA funds are taxable at the time of contribution, thereafter, Roth interest and capital gains are distributed income tax-free.

One popular rationale for maintaining a traditional IRA is that retired people may be in a lower tax bracket and would therefore pay less tax on withdrawals of IRA funds going out than they would tax on Roth contributions going in. Because of pension income, Social Security payments, and/or investment income, some Americans will find themselves in an equal or higher bracket after they leave their jobs. Also, present income tax rates are at an historical low—only the 1930s saw a lower individual tax rate than we’re experiencing today.

Traditional IRA account holders must take Required Minimum Distributions (RMDs) each year, beginning at age 70½. Roth IRA owners are not subject to RMDs. You can continue making contributions to a Roth IRA after age 70½ if you have taxable compensation and fall within the MAGI limits. Traditional IRA contributions are tax deductible and grow tax-deferred. Roth Contributions are not deductible but the earnings grow tax-free.

Is a Roth strategy right for you? Everyone’s situation is different and Roth rules are complicated so it is easy to make an error. That’s why it is very important that you discuss opening a Roth IRA or converting to a Roth IRA with your qualified tax professional and/or retirement distribution specialist.

IRA Summit: May 11-13, San Diego

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Rolling Over Your Retirement Plan

QUESTION: HOW CAN “TAX-INFESTED” MONEY BECOME “TAX-DEFERRED”?

You have some crucial decisions to make about how you take distributions from your hard-earned savings. Not understanding rollover regulations can lead to unintended tax consequences that chip away at your retirement funds.

The funds held in your retirement accounts are called “qualified savings,” since they qualify for special tax-deferred status by the Federal Government. If you decide to withdraw all of the money at once from those accounts, it is called a “lump-sum distribution.”

Your America’s Tax Solutions^TM retirement distribution specialist can explain the tax consequences of taking a lump-sum distribution and the benefits of rolling those funds into an IRA.

WATCH OUT

Plan administrators of your 401(k)s will not automatically assume you want to do a rollover. Also, the Tax Code provides for a 60-day window during which you can remove your qualified money from your pension plan or 401(k) and deposit into a traditional or Roth IRA. Be advised: The IRS does not trust that you will dutifully meet your 60-day obligation. If you request a lump-sum distribution, your employer is required to withhold 20% for federal income tax. Thus, on a $50,000 lump-sum distribution, you would pay $10,000 in withholding to the Federal Government.

FROM TAX-INFESTED TO TAX-FREE!

Your America’s Tax Solutions^TM retirement distribution specialist can explain how you may bypass the 20% withholding requirement by structuring the transaction as a trustee-to-trustee transfer. Your ATS specialist will also explain the legacy advantages of rolling your 401(k) into an IRA, including the ability to stretch the period of tax-deferred earnings within an IRA beyond the lifetime of the person who set up the account at a compounded, tax-deferred rate.

CAUTION: This Can Destroy Your Nest Egg…

There has been a huge spike in the life expectancy of Americans over the past several decades.  We have been conditioned to diligently save for our retirement.  We have been encouraged to have a retirement distribution strategy in place to help us maximize our retirement assets while mitigating and eliminating heavy, immediate and unnecessary taxation.  But what about that event that nobody likes to talk about that can destroy your nest egg?  This event is typically sudden, unanticipated and blindsides many Americans.   What is it?...

Today you may look and/or feel great.  Your spouse may be active and strong.  What happens if you or your spouse suddenly takes ill?  What if you or your spouse is suddenly faced with a debilitating injury or other health problem?  If you haven’t allocated some of your assets to handle a sudden illness or long-term care event, you have essentially allocated ALL of your assets to address this type of crisis. 

It may be hard to imagine yourself in a dire position now, but ignoring the fact that most Americans (or their spouse) will encounter a long-term care event at some point in their lives, will only serve to help erode the assets you have earmarked for retirement.  To give you an idea of what to expect, below are the average annual cost statistics in a few states from coast-to-coast for nursing home care.  The statistics are based on semi-private room accommodations:

If you are not sure how to handle and plan for a long-term care event, don’t keep putting it off.  All Americans should have a solid, well thought out plan to help protect themselves and their loved ones from financial and emotional devastation.  A long-term care planning assessment is a FREE service that retirement distribution specialists offer.  He or she can help you understand what options are available and what strategies make sense for you and are appropriate for your personal situation.

Does Your Current Policy Need a Make-Over?

We here at America’s Tax Solutions like to make sure our clients and their clients are always prepared.  Many Americans buy various types of insurance policies, put the paperwork in a drawer and never look at it again. Unfortunately, many of those people could be stuck with old policies they bought 10, 20 or even 30 years ago and they haven’t had them reviewed. Why is this important? Over the past several decades they may have experienced life changes and their planning needs have likely changed as well.

Did they consider things like tax diversification and tax-free retirement? Can these policies be used to help fund a college education for their kids or grandkids, protection against a long-term care disaster, and so on? If they were say 25 to 35 years old when they first selected their policies, probably not. There also may be better policies available today that didn’t exist back when they first met with their agent.

7 Points You Should Consider When Reviewing Old Policies:

1. You feel a higher rate of return may be realized with a new policy.

2. You feel that the current insurer may become insolvent and a more stable insurer can be obtained through a policy exchange or diversification of insurance carriers will increase safety and/or return.

3. You have exercised a loan provision against a policy, the interest paid on the policy is non-deductible, costs are increasing and you need to continue coverage.

4. You would like to change from an individual to a group product.

5. You can achieve a higher death benefit with a new product.

6. You would like to change an ordinary life policy into a single premium policy to eliminate the premium payment burden, obtain a higher rate of return on the underlying cash value and obtain a higher death benefit.

7. You have an ordinary life contract and you would like to exchange it for a universal, variable, or interest sensitive policy. Premium rates on the new policy are lower due to such factors as improved mortality tables, a non-smoking discount, a volume discount for several policies aggregated into one or other factors.

If you haven’t reviewed all of your active policies, it’s important to dust them off and take a look to make sure they still provide you with what you want. If you are unsure where to begin, don’t hesitate to reach out immediately to your retirement distribution expert, tax professional or agent. Remember, a basic policy review should always be a FREE service from your trusted advisors!