|Retirement-plan distribution land
Let's imagine that the cost of the shares of company
stock was only $100,000, and that the stock has appreciated nicely
over the years.
"You only pay tax on the cost,"
says Slott. What about the other $900,000? "That's NUA, and
you don't pay tax on any of those shares until those shares are
Furthermore, says Slott, you only pay capital gains
tax on the shares you sell at the favorable 15 percent rate. Because
there's no minimum holding rule on NUA shares, you don't even have
to wait a year after you transfer the shares to be eligible for
the long-term rate. In fact, you can pay tax at the long-term rate
the day after the transfer.
If you instead move all the money into an IRA, "the
NUA tax break is lost forever," says Slott. That mistake can
cause you to pay double the tax rate.
"We're seeing a whole new wave of employees --
the baby boomers mainly, and older people -- who are coming out
of a job after 30 years, that this benefit applies to," says
A good time to do this is when you separate from service,
since generally lump-sum distribution opportunities are triggered
by major life events (death, disability, retirement, etc.). If you
happen to be under age 55 when you leave your employer, you can
still get the NUA benefit, but you'll have to pay a 10-percent penalty
on the cost of the shares. Also, beneficiaries qualify for this
tax break "if the plan participant would have qualified had
he lived," says Slott.
Update the beneficiary form
Make sure your beneficiary form is up-to-date, including primary
and contingent beneficiaries, so that your assets end up where you
intend them to go. Did one of your primary beneficiaries predecease
you? It happens.
"You know what I see on those beneficiary forms?"
says Slott. "I see dead people! I see dead beneficiaries. ...
What's the life expectancy of a dead beneficiary?"
It's a legitimate question. Review the form annually,
and update it if necessary.
Also, don't bequeath your retirement money to your
estate. "If you leave it to the estate, you blow the stretch,"
says Slott. Plus you turn a nonprobate asset into a probate asset
-- a bad move.
The so-called "stretch" enables your beneficiaries
to extend distributions over their life expectancies. But the beneficiaries
have to be people, not estates. "Anybody with a pulse and a
birthday" qualifies, quips Slott. "Can you fog a mirror?
Sometimes it makes sense to leave retirement-plan
money in a trust, for example, if your children are minors, if you're
providing for a disabled person, if your descendant is unsophisticated,
vulnerable to con artists or irresponsible with money. Properly
set up, a trust can disburse money on the same schedule as the stretch
that doles out required minimum distributions over a beneficiary's