Company Stock Distribution Analysis Calculator

If you own company stock in a retirement plan you may be able to take advantage of using the long term capital gains tax rate rather than your ordinary income tax rate on this investment. Normally, all earnings withdrawn from a retirement plan are taxed as ordinary income, at ordinary income tax rates. However, if you rollover your employer's company stock from your retirement plan to a taxable investment account, you may be able to take advantage of a special set of rules that allow you to pay only capital gains taxes on a significant portion of the distribution. Use this calculator to see how such a transfer might benefit your retirement nest egg.

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General Assumptions

  1. Taxes, which are due as a result of the transfer of company stock from a retirement plan to a taxable account, will be paid from outside sources. In other words, a portion of the company stock is not sold to obtain the money necessary to pay the taxes.
  2. The entire distribution consists of company stock.
  3. The distribution qualifies as a "lump sum distribution". A lump sum distribution is defined in the Internal Revenue Code as the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind (pension, profit sharing, or stock bonus plans). The qualifying events to allow distributions are separation from service, permanent disability, death or after an employee attains age 59-1/2.

Definitions

Net unrealized appreciation (NUA)
NUA is the excess of the fair market value (FMV) of your company stock at the time of the transfer over its cost basis to the qualified plan's trust. This amount will be taxed when you eventually sell the stock in your taxable account. Your NUA is treated as a long-term capital gain, even if you sell your stock immediately after transfer. Please note that any appreciation above the FMV of the stock that occurs after your transfer will be considered a short-term capital gain if you hold onto your company stock for less than one year. If the stock is held for at least one year after the transfer, it is then characterized as a long-term capital gain.

Balance at time of distribution
This is the fair market value (FMV) of the company stock, which will be transferred from your retirement plan.

Total stock purchases (cost basis)
This is the total amount you and/or your employer paid for the stock that you will be transferring. This is also referred to as the company stock's "cost basis". Your retirement plan administrator is required to provide you with the amount of your cost basis. When you transfer company stock to a taxable account and use the NUA strategy, instead of rolling it to an IRA, you pay taxes at your marginal income tax rate on the cost basis of the stock. This means that if the fair market value (FMV) of the company stock shares within your 401(K) is $1,000, and the total purchase price is $200 (your cost basis), you would only initially pay taxes on the $200 cost basis. The cost basis is usually taxed as ordinary income. Unless you qualify for an exception, there may be a 10% penalty tax on the cost basis, if both of the following criteria apply:
  • You are younger than age 59-1/2
  • You are separated from service, from the employer providing the retirement plan, prior to the year in which you attained age 55
Please consult with your tax advisor for more details.

Rate of return
This is the expected rate of return on your company stock. This is only used to help project your future account balance and subsequent taxes. It is important to remember that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment.

Holding period
The number of years and months you expect to hold onto the company stock, after you have made the transfer.

Capital gains rate
This is the tax rate you expect to pay on any long-term capital gains. The current long-term capital gains tax rates through 2012 are:
  • 0% if your ordinary income marginal tax rate is 10% or 15%
  • 15% for all ordinary income marginal tax rates greater than 15%
Please note, this calculator does not include the impact of the Alternative Minimum Tax (AMT) which can increase the effective rate you pay on capital gains. Please contact your tax advisor for more information and the possible implications.

Marginal income tax rate
This is the tax rate used to determine taxes on your taxable income. Use the table below to help you determine your marginal income tax rate.
Filing Status and Income Tax Rates 2012
Tax rateMarried filing jointly
or qualified widow(er)
SingleHead of householdMarried filing separately
10% $0 - 17,400 $0 - 8,700 $0 - $12,400 $0 - 8,700
15% $17,400 - 70,700 $8,700 - 35,350 $12,400 - 47,350 $8,700 - 35,350
25% $70,700 - 142,700 $35,350 - 85,650 $47,350 - 122,300 $35,350 - 71,350
28% $142,700 - 217,450 $85,650 - 178,650 $122,300 - 198,050 $71,350 - 108,725
33% $217,450 - 388,350 $178,650 - 388,350 $198,050 - 388,350 $108,725 - 194,175
35% over $388,350 over $388,350 over $388,350 over $194,175
Source: Revenue Procedure 2011-52 http://www.irs.gov

Expected inflation rate
What you expect for the average long-term inflation rate. A common measure of inflation in the U.S. is the Consumer Price Index (CPI). From 1925 through 2011 the CPI has a long-term average of 3.0% annually. Over the last 31 years highest CPI recorded was 13.5% in 1980.

Separated from Service At Age 55 or Older
Check this box if you separated from service, from the employer providing the retirement plan, in the year you attained age 55 or later. Under these circumstances, there would be no 10% penalty tax on the distribution from the retirement plan.

Retirement Plan Distribution Will Be At Age 59-1/2 or Older
Check this box if the retirement plan distribution from the retirement plan will occur on or after the date you reach age 59-1/2. Under these circumstances there would be no 10% penalty tax on this, or any future distributions from the retirement plan or IRA.

IRA Distribution Will Be At Age 59-1/2 or Older
Check this box if the distribution from the IRA will occur on or after you reach age 59-1/2. Under these circumstances, there would be no 10% penalty tax on the distribution.

Present Value
The amount that a future sum of money is worth today based on an assumed inflation rate. By discounting future tax distributions to present values, comparisons between alternatives are placed on a common basis.