Have you invested in company stock through your retirement plan? Many companies offer this option. In fact, you might be able to buy shares of the stock at a discount.
Of course, you shouldn’t put all your eggs in one basket, but often it makes sense to tie part of your fortune to the company’s, particularly if you’re an owner or one of the main cogs in the machine.
Strategy: When you’re ready to retire, keep the payout in the form of company stock. Don’t convert it to cash or other securities. Reason: Thanks to a giant loophole in the tax law, you only have to pay tax on the stock’s original cost.
You don’t pay any tax on the appreciation in value—called the net unrealized appreciation (NUA)—since the time you’ve owned the stock. The gain on the company stock is 100% tax-free until, if ever, you sell your shares! The gain is taxed at favorable long-term capital gain rates. Icing on the cake: The IRS treats any subsequent gain as long-term capital gain so long as you’ve held the stock for more than one year after distribution. The maximum federal tax rate on long-term capital gain is only 15%.
So you can emerge a double tax winner: once when you leave the company and again when you sell the stock. This ultrafavorable treatment applies only to shares received as part of a lump-sum distribution from your employer’s retirement plan(s).
In the past, Congress has threatened to close the gaping tax loophole for NUA, but so far it’s managed to survive all challenges. Still, if Congress revives proposals to eliminate this tax break, it could encourage you to retire sooner rather than later.
Alternatively, you might choose to roll over a cash distribution into an IRA. This maneuver enables you to spread out tax as distributions are received. But the payments are then taxed at ordinary income rates. Saving grace: Usually, your top tax rate in retirement will be lower than your current tax rate for ordinary income.