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March 23, 2023
Mae West, an iconic 20th-century American actress, singer, comedian, and sex symbol, reportedly once said: “Too much of a good thing is wonderful.”
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 a particular 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 its 401(k) well, having worked there in HR from 1977 to 2008. You can substitute your own company if you’d like or have an aversion to XOM or the energy industry.
Upon an employee’s retirement, most of what’s in their 401(k) typically goes to an IRA and continues to grow tax-deferred. Distribution of cash from an IRA is generally taxed at ordinary income tax rates, up to 37% under current law.
Suppose you retire from ExxonMobil and transfer some or all of your ExxonMobil stock from your ExxonMobil Savings Plan (EMSP) to a taxable brokerage account. In that case, 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 (the “net unrealized appreciation”) until you 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.
This is a brief overview of a complicated subject, and you should evaluate your circumstances to determine what’s best for you. Talk to a competent financial advisor about your situation. Cerity Partners advisors are available to consult with you. Give us a call or make an appointment. And if you’d like to read other blogs from our website, visit us at https://ceritypartners.com/insights/category/exxonmobil/.
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.
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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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