by: Ken Morris
Don?t Knock Taking Your Employer Stock
Given the growth of employee-employer savings to meet retirement goals, it is not uncommon for employees to have a significant amount of employer stock in their qualified retirement plans.
When it comes time for employees to leave the nest, most are willing to directly rollover all qualified plan assets into a traditional IRA.
A traditional IRA rollover offers avoidance of an immediate income tax consequence, the retiree remains in control of his/her retirement assets and the benefits of tax deferral can continue.
However, there may be another option available that should be considered, a type of combination approach.
This option involves distributing employer stock to the retiree and directly rolling over the remaining balance of the plan assets into a traditional IRA.
This combination approach, though not for everyone, may have significant advantages.
By not including the employer stock in the traditional IRA rollover, the retiree is exposed to income taxes immediately.
This is because he/she is receiving the shares as a taxable distribution.
However, the taxes due will be only on the cost basis of the stock.
Therefore, it?s important to know what the actual cost basis of your employer shares are in your retirement plan.
The cost basis is essentially what the plan Trustee paid for the stock.
Exposing the stock to taxes now may be more advantageous in the long run because, in most cases, this cost basis of the employer stock will be much lower compared to the current market value.
The stock held outside the traditional IRA will continue to defer taxes on any appreciation.
When the retiree ultimately decides to sell the shares, he/she will pay long-term capital gain rates - currently capped at 15% - rather than at ordinary income tax rates, which could run 35% or more.
In addition, there are no minimum distribution requirements starting at age 70 1/2 or other nasty penalty taxes for this block of employer stock, allowing for more planning flexibility.
And lastly, the retiree?s heirs may miss out on another big tax break.
If these same shares of employer stock were rolled into a traditional IRA, the heirs would ultimately owe ordinary income taxes on the employer stock, as they would on any asset held in a traditional IRA.
This could result in a sizable income tax bill due at death, taxed at a potential 35%.
By rolling into a traditional IRA, the heirs are unable to utilize the benefits of long-term capital gains treatment when they decide to sell the stock and may lose a tax saving opportunity.
There are many technical requirements that must be met in order for this type of distribution to qualify as what?s known as a lump sum distribution.
Of course, diversification considerations and other investment fundamentals may show that rolling over stock to a traditional IRA may be the most prudent choice in many cases.
Therefore, it is highly recommended that retirees considering such a maneuver obtain professional advice.
Be sure to check with your financial planner or financial advisor whether you can reap the full benefits of holding on to your employer stock.
About The Author
Ken Morris Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their retirement plan.
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Renting vs. Buying: 7 Financial Facts
Renting vs. Buying: 7 Financial Facts
by: J Wynia
Fact: You are going to pay for a place to live. Period.
There is no free lunch and paying for a roof over your head is going to be part of your budget for a very long time. Given your needs (either just you, a partner or a larger family), there is a certain amount of space you need. For a family of 4, that means 3 bedrooms for at least 18 years and likely closer to 30. You are either going to spend that paying to live in someone else's home or your own.
Fact: Rent and mortgages are closer in monthly payments than you think.
Average 3BR rents in my metro area (Minneapolis) are $900-1000/month with many closer to $1200. That's for a rented condominium, not a house. In my metro area, there are currently over 250 condos and townhomes (equals owning the same thing you rent) under $1000 a month in payments. There are another 853 single family homes (an upgrade from apartments) under that...
Renting vs. Buying: 7 Financial Facts
Ira > Renting vs. Buying: 7 Financial Facts
Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
by: Simon Fox
Taking full advantage of your 401(k) plan today can help you achieve financial goals sooner, and provide enough income for a comfortable retirement. For most working people, Social Security checks alone will not be enough to maintain the standard of living they are used to, once they are no longer working. If you are lucky, your employer offers a 401(k) plan which, if used wisely and to the fullest advantage, can provide you with additional income for your golden years.
401(k) plans differ greatly depending on the employer who sets the rules. The only way to get the most out of the plan is to get to know it and make educated choices.
Things you should know:
- What is the maximum percentage of your salary you are able to contribute (see also 401(k)contribution limits set by IRS)?
- Is your employer matching the contributions? If yes, what is...
Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
Ira > Taking Full Advantage Of Your 401(k) ? How Well Do You Know Your Plan.
Substantially Equal Payments Relief
Substantially Equal Payments Relief
by: Ken Morris
If you initiated early distributions from your Individual Retirement Account (IRA) in the last couple of years using a Substantially Equal Payment plan, your annual distribution amount may be more than your current account balance can bear.
You may think there is nothing you can do to alter your distribution amount and slow down the depletion of your IRA account.
This is not true.
The IRS now permits you to make a one-time, permanent reduction to your annual distribution amount.
The primary purpose of an IRA is to accumulate assets for retirement.
Therefore, distributions taken before age 59 ? are subject to a 10% premature distribution penalty, unless an exception applies.
One such exception is a Substantially Equal Payment plan, which as you know is subject to several requirements.
For example, your may not stop or otherwise modify...
Ira > Substantially Equal Payments Relief
A Guide to IRA Accounts
A Guide to IRA Accounts
by: John Mussi
An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRA accounts, some being employer provided plans and others you set up yourself.
Traditional IRA
In a traditional IRA, the money is deposited before being taxed. It accumulates tax free on earnings until being withdrawn at retirement, at which point the money is taxed.
Since the money is contributed before taxes, you take a tax deduction for it (some exceptions), then let it grow until retirement. So, when you retire (presumably in a lower tax bracket) the money is taxed.
The main restriction on this one is that your annual contributions are only tax deductible if you're not covered by a pension, 401K, or any other retirement plan where you work. You can contribute only certain amounts per person into a Traditional...
A Guide to IRA Accounts
Ira > A Guide to IRA Accounts