As The Retirement Guys, we have retirees coming into our office on a regular basis for help with decisions relating to retirement.  Right before retirement, many times there are crucial decisions to make, such as what pension option to choose (lump sum, life-only payments, joint and survivor payments, etc.) and whether or not to roll over your 401(k) account to an IRA.

In most cases, it may be better to do a rollover rather than leave 401(k) account money with the employer because of a much wider choice of investment options that may not be available inside the employer plan. The retirement account holder is afforded much more flexibility and control by moving the money into an individual plan in which the account holder can choose the custodian and the underlying investments. Obviously, it can be easier to keep things more diversified if there are many more choices available. Although diversification doesn’t guarantee against loss, it is one method used to reduce risk.

Caution:  There may be times before taking the leap and rolling out the account into an IRA that other factors should be considered, such as the future taxation of the retirement account, especially if you own company stock.  Generally, a traditional tax-deferred retirement account has never been taxed and 100 percent of the account will be taxed when the money is withdrawn. Most people choose to continue to defer taxes as long as possible. Yet, in some cases, it can be smarter to pay some taxes now versus waiting until later.

Here is a tip that could save thousands of dollars in taxes. A client that is retiring in the next month or two came into our office for some help with these important retirement decisions. He had a retirement account that he wanted to roll over that included a substantial amount of company stock. Before he went ahead and rolled it over, we advised him to check his company stock for something called net unrealized appreciation (NUA). This strategy could save a 401(k) a significant amount in taxes.

This is how NUA works: Instead of rolling highly appreciated company stock over into an IRA, you remove the stock from the retirement account and deposit it into a taxable brokerage account. Depending on what the company stock cost, known as the cost basis, and what the price is when you remove it from your 401(k), thousands of dollars could be saved in taxes if the 401(k) owner is in a tax bracket higher than 15 perccent.

The idea here is that by removing the stock from the retirement account and paying taxes on it now, you will avoid paying income taxes at an ordinary rate on the stock’s net unrealized appreciation. The net unrealized appreciation is the difference between the value of the stock when it was acquired by your plan and the current value.  The 401(k) owner might be able to pay tax at a capital gains rate of 15 percent rather than the ordinary income tax rate that could be as high as 35 percent. Depending on the value and the amount of company stock, this could be a substantial savings.  To put it into real dollars to get a better feel for the effect, tax savings on $100,000 of profit in company stock could be as much as $20,000. Several additional rules apply when using NUA tax planning, so before any moves are made, make sure you get advice from an accountant and a securities licensed investment professional.

Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  The Retirement Guys are not an affiliate of NEXT Financial Group. Their office is located at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. Neither the information presented nor any opinions expressed in this article constitute a solicitation for the purchase or sale of any security.

Tags: Retirement Guys

This entry was posted on Friday, July 2nd, 2010 at 12:00 am and is filed under Retirement Guys, Toledo Business Link.
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