A Money-Saving Secret When Retiring
There’s a cool way to save money on taxes when you retire. I (and most readers, I imagine) don’t have immediate use for this little trick, but I’m posting it for my own future benefit. Anyway, it’s a little-known technique called Net Unrealized Appreciation. It works like this.
When you leave you job, either at retirement or for any reason (as long as you’re 55 or over), and you have 401(k) money in company stock, you can take a distribution and save money on taxes.
Typically, it’s a really bad idea to take a distribution from a 401(k) - and that’s still true if you’re under 55 because you’ll pay the 10% penalty - but here it can work to your advantage. You can use the original cost basis for the company stock portion of your 401(k) to set your tax floor. An example is probably better than trying to explain it.
Let’s say you’re finally retiring to concentrate on your Hummel figurine collection. Because you didn’t read my post on selling your company stock right now, your 401(k) contains company stock worth $200,000. Your cost basis, though, is $90,000, meaning you have a net unrealized appreciation of $110,000. Instead of rolling over the entire amount to an IRA, you take the stock portion as an in-kind distribution. You pay taxes on the $90,000 as ordinary income, but the $110,000 is taxed as a long term capital gain.
As long as your tax rate is greater than the long term capital gains rate (which is 15% right now), you save money on taxes.
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