Institutional

Potential Tax Savings with NUA

By David Chazin

Tax Savings with NUAMany employees at Chevron leave a large percentage of their ESIP in Chevron stock. And why wouldn’t they? Chevron has done consistently well for many years. If you own company stock in a workplace retirement plan like Chevron’s, you may qualify for a little-known tax break called NUA.

Upon retirement, employees are faced with the large decision of how to distribute their Chevron stock assets. Net Unrealized Appreciation, or NUA, is the difference between the price you originally paid for a stock and its current market value. For example, if you bought 200 shares at $50 a share (total value $10,000), but ten years later the shares are each worth $120 for a total value of $24,000. NUA is the $14,000 difference between the original cost basis and the current market value.

How does this affect you? Chevron employees need to decide when they retire whether they want to roll all of their assets including Chevron stock into an IRA or transfer their Chevron stocks into a separate taxable account and the rest into an IRA. The latter option, if you qualify for NUA, might be more tax effective. Transferring most types of assets from a 401(k) plan to a taxable account requires you to pay ordinary income tax on the market value. However, with NUA, when you move your company shares into a nonqualified brokerage account you’ll pay ordinary income tax on the stock’s cost basis (the original $10,000) and pay long-term capital gains tax on the net unrealized appreciation (the $14,000 it has appreciated when you ultimately sell the shares). Capital gains tax is only 15% for most Chevron employees, which compared to the 39.6% top income tax rate means your potential tax savings may be substantial depending on how much your company stocks appreciated.

In order to qualify for NUA as a tax break, you need to meet four of the following criteria:

All assets from all qualified plans you hold with Chevron must be distributed within a calendar year, even if only one has Chevron stock.
Your entire vested balance in your ESIP must be distributed (usually into an IRA) within one tax year (but you don’t have to take all the distributions all at once).
Your distribution of Chevron stock must be taken as actual shares – not converted to cash beforehand.
You must have experienced: a) separation of service from Chevron, b) reaching age 59 ½, c) total disability, or d) death, in which case your beneficiaries would be able to sell the stock they inherit and take advantage of the long-term capital gains tax on NUA just as you would have.
Like all strategies, there are some things to consider: tax rates, absolute NUA, percentage of NUA and the time frame you plan for distribution. For example, the larger the difference between long-term capital gains tax rate and the ordinary income tax rate, the greater potential tax savings with NUA. Similarly, a NUA creates greater potential tax savings if it is a higher percentage of total market value – due to more of the proceeds being taxed at lower capital gains rate and less taxed at income tax rates. The larger the stock’s appreciation value, the more NUA can save you on taxes as well. Lastly, a shorter time frame of keeping your assets invested in an IRA makes NUA the better choice, while plans to keep assets invested in the IRA longer-term, the greater potential benefits of tax-deferred growth on the account.

Whether NUA is right for you is a complex decision – should you fail to meet any of the criteria at any point, your NUA election could be disqualified and you would owe ordinary income taxes on top of any penalty on the amount of company stock distribution. I would be happy to sit down with you for a review of your finances and analyze your options going forward. Because I work with well over 200 Chevron executives, managers, employees and retirees, I’m knowledgeable about your ESIP, CRP, LTIP, CIP, RRP, NUA potential and other issues specific Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.

Please contact me at (925) 659-8007 with specific questions or to schedule a time to meet in my San Ramon or Point Richmond offices.

To learn more about what Insight Wealth Strategies can do for you or your colleagues in San Ramon, Point Richmond, or Houston, TX, please call us at (800) 318-7848, email us at info@insight2wealth.com or fill out the request information form.

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