Financial planning requires a customized strategy for each person. Unfortunately, return on investment isn’t the only variable to consider. The taxes paid on earnings, especially when planning for retirement, can drastically affect an individual’s net worth and post-retirement income. The tax on stock options is no different. While you can’t avoid paying taxes, you can create a strategy that decreases tax liability. Forbes magazine covered this topic earlier this year in an articled entitled, “Tap Into Employer Stock Without Paying Taxes (For Now).” Consider a bit of their insight on the matter.
Pay Tax Only on the Basis
Employees often have employer’s stock at a low basis within their retirement plan. If this is your situation, you can withdraw your stock and only pay tax on the basis amount. This provision allows investors to transfer a substantial amount of their stock at a lower tax rate. The lower your basis amount, the more substantial the savings. For example, Forbes used the scenario of a person having $1 million in company stock, but the basis was only $100,000. Even if this person removed all of their funds, he or she would only pay tax on the $100,000 basis. The remaining $900,000 can be transferred with no tax liability.
Even if a 10 percent penalty applies, it would still only take 10 percent of the basis. However, profits from the sale of the stock would be subject to the 20 percent capital gains rate. Additionally, dividends from the stock will be subject to a 20 percent tax. However, this rate is far lower than the tax you would pay on dividends from a traditional retirement plan, such as a 401(k) or IRA, which are subject to basic income tax rates.
Investors need to note that this special tax provision is only applicable when it’s part of a total distribution over the course of one calendar year. It does not apply if you select different shares with varying cost basis’. You can roll over the balance into an IRA, but remember this tax option will no longer be available.
Withdrawing employer stock should be a well thought-out decision. There is not one plan that works for every person and every type of account. Talking with a professional, especially a person experienced with employer stock, is highly recommended to yield the highest benefit. Roberts Tax Advisory has experience in every aspect of financial life, professional and personal. Contact us for help with your strategy.