As a Moog employee, you likely own Moog stock in your 401(k) plan. Many publicly traded companies offer company stock as a way to promote an “ownership mentality” by making employees shareholders of the company.
As we all know, your 401(k) dollars will eventually be taxed as ordinary income when withdrawn from your account. However, this may not be the case with employee stock. The Internal Revenue Code offers a favorable tax treatment for employee stock — called Net Unrealized Appreciation (NUA) — which could save you a significant amount in taxes, if you use it correctly.
What is NUA?
Net Unrealized Appreciation (NUA) allows employees to transfer company stock from a retirement account to a brokerage account. While the cost basis is taxed as ordinary income, the unrealized gain in the shares is taxed at preferential long-term capital gains rates.
For instance, let’s say you have $100,000 in Moog stock sitting in your 401(k), with a cost basis (what you paid for the shares) of $40,000. If left in your 401(k), the entire $100,000 would be taxed as ordinary income when the funds are ultimately withdrawn from the account. Using the NUA strategy, however, would mean that only your original $40,000 would be taxed as ordinary income. Your gain ($60,000) would then be taxed at preferential capital gains rates.
Most retirees will pay a capital gains rate of 15% (though some may qualify to pay nothing). This can be considerably lower than your ordinary income rates.
Are there any requirements to make the NUA election?
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- The transfer needs to be made in-kind.
Selling the shares, transferring cash, then repurchasing shares in a brokerage account does not qualify. Shares need to be transferred directly to a brokerage account. - The 401(k) plan must take a lump sum distribution.
In this circumstance, it means all the money needs to be distributed from the plan in one year. No partial rollovers are allowed. - The distribution must occur after a triggering event:
- Death
- Disability
- Separation from service
- Reaching age 59.5
- The transfer needs to be made in-kind.
At first glance, making an NUA election sounds like an obvious choice, but it really depends on personal circumstances. Here are some factors to consider to determine if making an NUA election is right for you:
Cost Basis
If you have a very low cost basis, the NUA election becomes more attractive. Ordinary income taxes are immediately due on the cost basis of the stock. So the lower the basis, the less tax you will have to pay up front.
Holding Period
The NUA strategy makes the most sense if you were planning to sell the shares soon anyways.
Future Tax Rates
If you expect tax rates to be lower in retirement, NUA is less intriguing. This is because the spread between ordinary income rates and capital gains rates narrows.
If you are an employee who owns Moog stock and are currently thinking about retirement, we have a plan for you. Ogorek Wealth Management (based in Buffalo, NY) specializes in managing wealth and building retirement plans for Moog employees. We are experts in your benefits plans and will work to ensure you are making the correct NUA decision based on your individual circumstances.
Learn more about Ogorek Wealth Management and our unique approach by scheduling a time to meet.
Gain comfort in one of the most important decisions in your life.
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