When you receive a distribution of your employer’s stock from a qualified retirement plan, the stock may be eligible for special tax treatment. Following are answers to some questions you may have.
What special tax treatment is available?
For distributions from qualified employer retirement plans, if you hold your company’s stock rather than roll it over into an individual retirement account (IRA), the lower of the average cost of the stock to the plan or the market value of the distribution will be included in your taxable income for that year. This amount generally will betaxed as ordinary income (unless you are eligible for forward averaging) and will become your cost basis in the stock. This is your only tax liability until you sell the stock. (Unless you are under the age of 59 1/2, in which case, talk to an advisor before making any tax related investment decisions).
When you do sell the stock, the remaining net unrealized appreciation or NUA (the difference between the stock price at the time of distribution and its cost to the plan) is taxed at the capital gains rate and treated as if the stock had been held longer than 12 months.
Any gain in excess of NUA is taxed at the capital gains rate based on the time period from distribution to sale.
Which distributions qualify? The special tax treatment of NUA always applies to a distribution of employer stock you purchased with your own after-tax contributions to the employer’s plan.
For shares bought with employer contributions pre-tax employee contributions and plan income, NUA special treatment applies only to a lump-sum distribution—i.e., distribution of the entire account balance within one taxable year as a result of separation from service, turning age 59 1/2, or death.
May only part of the distribution be rolled over? Although the special tax treatment of NUA on pre-tax shares applies only to lump sum distributions, you do not have to take possession of the entire distribution if part of it consists of employer stock and part of it is in, for example, cash or other securities. In this case, you may receive the company stock and roll over the balance of the distribution to an individual retirement account. IBI