For example: Let’s say Lydia has 10,000 shares of XYZ stock in her qualified plan. The current value of the stock is $80,000 ($8.00 per share). Lydia’s basis in the stock is around $300,000.
Plan participants holding company stock within a retirement plan that has declined in value might consider “re-setting” the cost basis of the stock by selling the stock within the plan and then re-purchasing it soon after.
Assuming Lydia sells her shares within her qualified plan and shortly after re-purchases the stock within the plan at $10.00 per share her new basis will be $100,000 versus $300,000.
Wondering about wash sale rules? Assuming wash sale rules remain in place, it makes sense to wait 31 days before repurchasing the stock in a retirement plan. By lowering the cost basis of the stock, you may improve the potential benefit of being able to apply NUA treatment when distributing the stock from the plan in the future.
Assuming Lydia retires in 15 years and XYZ stock has a long term rate of return of 6%, upon retirement the value of Lydia’s stock would be $220,000 or $22 per share. With a basis of $100,000 ($10 per share) assuming Lydia utilizes Net Unrealized Appreciation she would pay ordinary income tax on $100,000 @ a hypothetical personal income tax rate of 35% and favorable capital gains tax rates on $120,000 ($53,000 total tax bill) verses ordinary income tax on the full $220,000 ($77,000 tax bill).
For more details on Net Unrealized Appreciation, take a look at my previous blog.
Illustrations given are hypothetical and are not intended to reflect the actual performance of any particular security or investment account. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are hose of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.