Company Stock Distribution Analysis CalculatorIf you own company stock in a retirement plan you may be able to take advantage of using 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 Normally, all earnings withdrawn from a retirement plan are taxed as ordinary income, at ordinary income tax rates.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 rollover 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 transfer might benefit your retirement nest egg.
General Assumptions
- Taxes, which are due as a result of the transfer 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 is in the form of a "lump sum". A lump sum distribution is defined by the IRS as the distribution payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind (pension, profit sharing, or stock bonus plans).
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Definitions
- Net unrealized appreciation (NUA)
- NUA is the difference between the current market value (CMV) of your company stock at the time of the transfer and its cost basis. This amount will be taxed when you eventually sell the stock in your taxable account. Your NUA is considered a long-term gain, even if you liquidate your stock immediately after transfer. Please note that any appreciation above the CMV of the stock that occurs after your transfer will be considered a short-term capital gain if you hold onto the company stock for less than one year. If the stock is held for at least one year after the transfer, it is then characterized as a long-term capital gain.
- Balance at time of distribution
- This is the current market value (CMV) of the company stock, which will be transferred from your retirement plan.
- Total stock purchases (cost basis)
- This is the total amount you and/or your employer paid for the stock that you will be transferring. This is also referred to as the company stock's "cost basis". Your retirement plan administrator is required to provide you with the value of your cost basis. When you transfer 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 current market value (CMV) 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, if you meet both the following criteria:
- You are younger than age 59 1/2
- You are separated from service, from the employer providing the retirement plan, prior to the year in which you attained age 55
Please consult with your tax advisor for more details.
- 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.
- Holding period
- The number of years and months you expect to hold onto the company stock, after you have made the transfer.
- Capital gains rate
- This is the tax rate you expect to pay on any long-term capital gains. The current long-term capital gains tax rates are:
- 5% if your ordinary income marginal tax rate is 10% or 15%
- 15% for all ordinary income marginal tax rates greater than 15%
Please note, this calculator does not include the impact of the Alternative Minimum Tax (AMT) which can increase the effective rate you pay on capital gains. Please contact your tax advisor for more information and the possible implications.
- Marginal income tax rate
- This is the tax rate used to determine taxes on your taxable income (line 40, IRS Form 1040). Use the table below to help you determine your marginal income tax rate.
| Filing Status and Income Tax Rates 2007 |
| Tax rate | Married filing jointly
or Qualified Widow(er) | Single | Head of household | Married filing separately |
| 10% |
$0 - 15,650 |
$0 - 7,825 |
$0 - $11,200 |
$0 - 7,825 |
| 15% |
$15,651- 63,700 |
$7,826- 31,850 |
$11,201- 42,650 |
$7,826- 31,850 |
| 25% |
$63,701- 128,500 |
$31,851- 77,100 |
$42,651- 110,100 |
$31,851- 64,250 |
| 28% |
$128,501- 195,850 |
$77,101- 160,850 |
$110,101- 178,350
|
$64,251- 97,925 |
| 33% |
$195,851- 349,700 |
$160,851- 349,700 |
$178,351- 349,700 |
$97,926- 174,850 |
| 35% |
over $349,700 |
over $349,700 |
over $349,700 |
over $174,850 |
Source: http://www.irs.gov/formspubs/article/0,,id=164272,00.html
- Expected inflation rate
- 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), which has a long-term average of 3.1% annually, from 1925 through 2006.
- 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.
- Initial Distribution Will Be At Age 59 1/2 or Older
- Check this box if the initial distribution from the retirement plan will occur on or after 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.
- Final 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.
- 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.
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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 can not 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.
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