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Your employer may have contributed shares of its stock to your retirement account. If contributions were made years ago, the value of shares may be much higher
today.
If you take a lump-sum distribution when you retire, you may be concerned with a potentially large tax bill. The value of the potential gain in these shares in your account is called
the net unrealized appreciation. The amount of appreciation is the gain in value of shares while in your retirement account. The gain is unrealized because you have not yet sold the
shares for a gain.
If the lump-sum distribution consists of company stock, you will likely qualify for a tax deferral on the amount of net unrealized appreciation.
Let's assume that your employer contributed 1,000 shares to your retirement account 30 years ago. At that time, the total value of the stock was $20,000. When you retire this year,
the total value of the stock has increased to $300,000.
In this case, you would only owe income taxes on the original basis, or $20,000. Taxes on the $280,000 appreciation would be deferred until you sell the stock and when you do, you'll
be taxed at the long-term capital gains rate of 15%. If you were born before 1936, you may also be able to elect to pay these taxes over a 10-year period.
For more information, see IRS Form 4972: "Tax on Lump-Sum Distributions."
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax
adviser.
Return To Planning Retirement Strategy
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