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November 20, 2019
Mae West, an iconic 20th century American actress, singer, comedian and sex symbol, reportedly once said “Too much of a good thing is wonderful.”
We’re pretty sure Mae wasn’t talking about net unrealized appreciation (NUA). But Mae’s observation raises a valid question. “Can there be too much of this good thing, this NUA?”
Net unrealized appreciation refers to special tax treatment afforded employer stock in a tax-qualified retirement plan like a 401(k). I’m using ExxonMobil here because I know the company and their 401(k) pretty well, having worked there for almost 31 years from 1977 to 2008. You can substitute your own company if you’d like, or if you have an aversion to XOM or the energy industry.
Upon an employee’s retirement, most of what’s in his or her 401(k) typically goes to an IRA, and continues to grow tax-deferred. Distributions of cash from an IRA are generally taxed at ordinary income tax rates, up to 37% under current law.
If you retire from ExxonMobil and transfer some or all of your ExxonMobil stock from your 401(k) to a taxable brokerage account at retirement, you may be taxed on the cost basis of the stock (unless you have after-tax contributions that can be allocated to it). But you aren’t taxed on the difference between the cost basis and the market value at distribution (that’s the “net unrealized appreciation”) until you actually sell the stock. And at that sale, you only pay capital gains taxes (typically 15% or 20%), rather than ordinary income tax.1
Other sources say Mae West’s actual quote was “Too much of a good thing can be taxing.” Again, she wasn’t talking specifically about ExxonMobil NUA stock. But you need to assess how much of a good thing—NUA treatment on employer securities—is good enough, and how much may be more than you need or want.
Talk to a competent financial advisor about your particular situation. This is a brief overview of a complicated subject, and your circumstances should be evaluated to determine what’s best for you. Cerity Partners advisors are available to consult with you. Contact Us today.
1 There are several requirements that must be met for a distribution of employer securities to be eligible for net unrealized appreciation tax treatment. Consult with your tax or accounting advisor or Human Resources department for more specific rules regarding your plan.
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Florida, Illinois, Massachusetts, Michigan, New York, Ohio and Texas. Registration of an Investment Advisor does not imply any level of skill or training. There is no guarantee that the views and opinions expressed will come to pass. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees, conflicts of interest, and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money. Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. You should not construe the information contained herein as personalized investment, tax, or legal advice. Material in this publication is original or from published sources and is believed to be accurate. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. Readers are cautioned to consult their own tax and investment professionals with regard to their specific situations. Cerity Partners is not endorsed by or affiliated with Exxon Mobil Corp.
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Doug is a Partner based in the Houston office and a member of the firm’s Wealth Management practice. He is responsible for delivering investment and...
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