401(k) Net Unrealized Appreciation Calculator
The purpose of this 401(k) Net Unrealized Appreciation vs. Rollover calculator is to examine the possible tax benefits of transferring your 401(k) investments to a taxable account. In some cases, doing so can actually reduce your tax burden by treating the growth in your investments as capital gains instead of regular income upon disbursement. This calculator assumes the distribution of your entire 401(k) in a single lump sum and reinvesting them into a taxable account, rather than rolling them over into an IRA.
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Distribution analysis inputs:
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Estimated Tax on Distributions*
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- Taxes, which are due as a result of the distribution 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.
- The entire distribution consists of company stock.
- 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 (e.g., pension, profit sharing, or stock bonus plans). The qualifying events that allow distributions are separation from service, permanent disability, death or after an employee attains age 59-1/2.
Net unrealized appreciation (NUA)
NUA is the excess of the fair market value (FMV) of your company stock at the time of the distribution 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. If you take a taxable, in-kind distribution of your company stock, your NUA is treated as a long-term capital gain, even if you sell your stock immediately after the distribution. Please note that any appreciation above the FMV of the stock that occurs after your distribution from the plan, will be considered a short-term capital gain if you liquidate your company stock within one year of the distribution date. If the stock is held for at least one year after the distribution date, it is then characterized as a long-term capital gain.
If you roll over your company stock to an IRA, rather than taking it as a currently taxable, in-kind distribution, the NUA will be subject to taxation at the ordinary income rates, rather than capital gains rates, when it is subsequently withdrawn from the IRA.
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.
Balance at time of distribution
This is the fair market value (FMV) of the company stock, which will be distributed from your retirement plan.
Total stock purchases (cost basis)
This is the total amount you and/or your employer paid for the stock that is being distributed. 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 request an in-kind distribution of 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; the two most common exceptions are:
- You are at least age 59-1/2 at the time of the distribution
- You separate from service, from the employer providing the retirement plan, in or after the year in which you attained age 55
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.
The number of years and months you expect to hold onto the company stock after you have taken the distribution.
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 for 2016 is currently calculated as:
- 0% if your ordinary income marginal tax rate is 10% or 15%
- 15% if your ordinary income marginal tax rates greater than 15% and less than 39.6%
- 20% if your ordinary income marginal tax rate is 39.6%
- An additional 3.8% for the excess of Adjusted Gross Income (AGI) over the $200,000 (singles) or $250,000 (married)
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. Use the ‘Filing Status and Federal Income Tax Rates’ table to assist you in estimating your federal tax rate.
|Tax Rate||Married Filing Jointly or Qualified Widow(er)||Single||Head of Household||Married Filing Separately|
|*Caution: Do not use these tax rate schedules to figure 2018 taxes. Use only to figure 2019 estimates. Source: Rev. Proc. 2018-57|
|10%||$0 - $19,400||$0 - $9,700||$0 - $13,850||$0 - $9,700|
|12%||$19,400 - $78,950||$9,700 - $39,475||$13,850 - $52,850||$9,700 - $39,475|
|22%||$78,950 - $168,400||$39,475 - $84,200||$52,850 - $84,200||$39,475 - $84,200|
|24%||$168,400 - $321,450||$84,200 - $160,725||$84,200 - $160,700||$84,200 - $160,725|
|32%||$321,450 - $408,200||$160,725 - $204,100||$160,700 - $204,100||$160,725 - $204,100|
|35%||$408,200 - $612,350||$204,100 - $510,300||$204,100 - $510,300||$204,100 - $306,175|
|37%||Over $612,350||Over $510,300||Over $510,300||Over $306,175|
Expected inflation rate
This is 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 2018 the CPI has a long-term average of 2.9% annually. Over the last 40 years highest CPI recorded was 13.5% in 1980. For 2018, the last full year available, the CPI was 2.2% annually as reported by the Minneapolis Federal Reserve.
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.
401(k) Net Unrealized Appreciation Calculator Overview
The conventional wisdom is that the best thing to do with your 401(k) is to leave it alone until you need the money. However, that isn't always the case.
Why? Because some investors may be better off allowing their money to grow in a regular taxable account rather than a 401(k). Because capital gains are often taxed at a lower rate than regular income.
A regular 401(k) allows you to make pre-tax contributions to a retirement savings account, where you investments also grow tax-free until you need it. When you begin to take disbursements, you pay income tax on that money – meaning you're paying income tax on both your original contributions and the gains you obtained by investing that money.
For investors, income may be taxed at rates of 25 to 40 percent. But capital gains are taxed at only 15 percent.
If you take your money out of your 401(k) and invest it in a taxable account, you pay income taxes on what you withdraw but your investments going forward will be treated as capital gains. So any further growth in your investments will only be taxed at the capital gains rate, currently 15 percent.
Depending on your anticipated tax rate and how long you plan to let the money grow in a taxable account, that can add up to a considerable savings. This calculator is designed help you figure out just how much.
Using the 401(k) Net Unrealized Appreciation Calculator
To use this tool you will need to enter the balance of your 401(k) at the time of the distribution, the total stock purchased using cost basis, the current rate of return on your investments, holding period years, holding period months, capital gains rate, and marginal income tax rate.
Enter your information in the boxes indicated. Click on the description of any box for an explanation of what that box requires.
The calculator assumes that you are taking a lump sum distribution of company stock from a retirement account and that such company stock will be transferred to a taxable account, rather than being sold.
The Net Unrealized Appreciation (NUA) is the increase in the value of your company stock since it was acquired for your 401(k). You are taxed on this amount as a long-term capital gain when you receive the stock as a disbursement from the 401(k).
If you put then put the stock into a taxable account, any further increase in value will be treated as a capital gain when you eventually sell the stock. But if you roll the stock over into an IRA, that increase will be treated as regular income.
Note that if you roll over your stock to an IRA, rather than taking it as a taxable, in-kind distribution
You generally have to pay a 10 percent penalty on funds withdrawn from a 401(k) or IRA prior to age 59 ½. However, this doesn't apply if you separated from the service of the employer providing the retirement plan at age 55 or above. If you do not check any of these boxes, the calculator will assume you will be assessed the 10 percent penalty.
This calculator will run these figures and show you your total immediate taxes and total future taxes for each investment scenario. Click "View Report" for a detailed rundown.
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