section 1 - The American College Online Learning Center

6. Net unrealized appreciation rules apply when:multiplied by the fraction $20,000 divided by $50,000 which equals$4,000. However, If the client has an additional $950,000 rolloverIRA, then multiply $10,000 by the fraction $20,000 divided by$1,000,000, the value of both IRAs and now only $200 withdrawn isexempt from income tax.a. The client receives a lump-sum distribution (defined as an entire distribution withinone year) from a qualified plan which includes a distribution in-kind of employersecurities.(1) Example: Jimmy, age 62, receives a distribution of company stockcurrently worth $200,000 that was only $50,000 when allocated to hisaccount. He is in the top 35% marginal tax bracket.b. The value of the stock when it was allocated to the participant’s account is treatedas ordinary income.(1) So in Jimmy’s case, $50,000 is taxed at time of distribution as ordinaryincome (at the 35% rate).c. The difference between that value and the current market value is the NUA(1) In Jimmy’s case, $200,000 – $50,000 = $150,000 of NUAd. The NUA is taxed at long-term capital gains rates when the stock issold—regardless of when that occurs, meaning that there is no holding periodrequirement.(1) In Jimmy’s case, $150,000 of NUA will be taxed at the current toplong-term capital gains rate of 15% regardless of when it is sold.e. If there is any additional gain from when the stock is distributed to when it is sold,the gain is taxed as short- or-long-term gain depending upon the holding period.(1) In Jimmy’s case assume that the stock is sold 5 years later for $250,000.$50,000 is not taxed (as it was already taxed), $150,000 is taxed as NUA,the additional $50,000 is also taxed as long-term capital gains because thestock has been held for more than 12 months.f. NUA planning(1) The decision whether or not to take advantage of the NUA rule must bemade at the time of the distribution. If the distribution is rolled into anIRA or the distribution is taken in cash (instead of employer stock), theopportunity is lost.(2) Planners should discuss the NUA issue with the client.(3) There is no easy answer as to whether it is appropriate to elect NUA taxtreatment.(4) The NUA rule is only valuable when there is a significant differencebetween the value of the stock when it was allocated to the client’s accountand the market value at the time of the distribution.(5) The participant who has not attained age 59½ will have to pay the earlywithdrawal 10% penalty tax, but only on the portion of the distribution thatis subject to ordinary income tax.(6) It is appropriate to make the election if the client needs current cashbecause the capital gains tax rate will be less than the ordinary income4.8