Net Unrealized Appreciation as a Retirement Tax Planning Strategy - YouTube

Hi, this is Joe Elsasser, president and founder of Covisum and also a practicing financial

advisor.

And welcome to another finplan Friday today's topic is net unrealized appreciation.

If you have clients who have company stock in their 401k plans, that has highly appreciated

over time, there may be a huge opportunity for tax advantage, and that opportunity is

called net unrealized appreciation in effect, your client is able to roll out those dollars

that are in company stock into a brokerage account.

They'll pay ordinary income tax only on the basis in that company's stock.

And they will be able to pay capital gains tax, which is most often at a lower rate on

the appreciation when they sell it in the brokerage account.

So it's a really important opportunity to explore with any client that has highly appreciated

company stock in their 401k plan.

Now, there are a few important caveats here.The first is that the company stock must be rolled

in kind to the brokerage account.

You can't sell the stock in the 401k and then rolled the money into a brokerage account.

You'll lose that UA tax treatment.

The second is that you'll really want to be planning around their other incomes.

In other words, I would not want to exercise Thea option while I'm still working, because

if I do, I'm gonna end up paying tax on the basis at my highest marginal rate, which is

gonna be stacked on top of my earned income.

So most often that first step in the UA process paying tax on the basis of the company stock

should be done in the year that the client retires or the year after, just depending

on how much earned income we wanna make sure their earned income is, is low in the year

that they actually execute that.The second consideration is that you'll most likely not

want to recognize the capital gain in the same year that you recognize the basis.

And the reason for that is that, and, and this is for middle income clients now for

your high income clients.

It's not gonna make much of a difference, but for middle income clients, if you can

recognize the basis in one year, and then in the next year, you can recognize some portion.

If not all of the capital gain, you might be able to get some portion of that capital

gain out at a zero or a 15 without having the additional net investment income tax.

So being really mindful of how much capital gain you're recognizing in each year, and

oftentimes not recognizing that capital gain in the same year that you're recognizing the

basis is a lot of the planning that needs to go into, uh, a net unrealized appreciation

situation.Now, one final thing to consider is the idea of stacking UA with a social security

strategy.

You've heard us talk over and over and over again about social security strategies paired

with Roth conversions.

And it's a, that's a great concept.

It's a very similar concept here.

If you're implementing a social security strategy, most often you're delaying the highway journaler,

uh, benefit in the household for as long as possible out to age 70, and that clears space

to do Roth conversions in the same way.

It also clears space to do an UA transaction where you are recognizing the basis because

you're not gonna wanna be making social security taxable when it otherwise, uh, wouldn't have

to be not to mention the benefits of the social security, uh, strategy in the first place.

So pairing social security strategy with net unrealized appreciation, spreading out tax

over a couple of years, as you execute that UA, uh, strategy can be a highly valuable

technique with your financial planning clients.

Thanks so much.

We look forward to the next finplan Friday.