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Make the most of company stock in your 401(k)

Key takeaways

Are you one of the 2+ million Fidelity customers who holds company stock in a 401(k) or other workplace retirement savings plan?

If so, you should know about a tax break that could save you a bundle—if you qualify.

Anyone who owns company stock will eventually have to decide how to distribute those assets—typically when you retire or change employers. Taking a distribution could leave you facing a big tax bill, but a little-known tax break—taking advantage of net unrealized appreciation (NUA)—has the potential to help.

"With appreciated company stock, you'll face the question of what kind of taxes—capital gains vs. ordinary income taxes—you will wind up paying on the gains of your company stock holdings over time," says Mitch Pomerance, vice president and financial consultant at Fidelity Investments.

"With NUA, when you have company stock in your qualified retirement plan, such as your 401(k), and take a lump-sum distribution from a qualified retirement plan, you can effectively pay lower capital gains rates on a portion of your tax-deferred assets instead of paying the typically higher ordinary income rates when assets are withdrawn from the tax-deferred account," explains Pomerance.

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What is NUA?

NUA is the difference between the price you initially paid for a stock (its cost basis) and its current market value. Say you can buy company stock in your plan for $20 per share, and you use $2,000 to purchase 100 shares. Five years later, the shares are worth $35 each, for a total value of $3,500: $2,000 of that figure would be your cost basis and $1,500 would be NUA.

Why should you care about NUA? When you want to distribute company stock or its cash value out of your 401(k), you will face a choice: Roll it into an IRA (or another 401(k) plan), or distribute the company stock into a taxable account and roll the remaining assets into an IRA or 401(k). The latter option might be more effective, depending on your circumstances, thanks to IRS rules governing NUA.

When you transfer most types of assets from a 401(k) plan to a taxable account, you pay income tax on their market value. But with company stock, you pay income tax only on the stock’s cost basis—not on the amount it gained since you bought it. (If you are under age 59½, you may also pay a 10% early withdrawal penalty.) Remember, upon direct, in-kind transfer to an IRA the special NUA tax advantages for company stock are lost. Note: There may also be an option available to leave the company stock assets in the 401(k), without any type of rollover or distribution.

When you sell your shares, you’ll pay long-term capital gains tax on the stock's NUA, along with any additional capital gains that occur after you make the distribution. The maximum federal capital gains tax rate is currently 20%, far lower than the current 37% top income tax rate, so your potential tax savings may be substantial. (Also note that when The Tax Cuts and Jobs Act of 2017 expires in 2026, the current top income rate is expected to reset to 39.6%.)

"In general, if the cost basis is low, relative to the size of the stock position in your 401(k), it may make sense to take the tax hit now, rather than later on the full amount," says Pomerance.

When to choose an NUA tax strategy

Consider the following 4 factors as you decide whether to roll all your assets into an IRA or to transfer company stock separately into a taxable account:

Tax rates. The larger the difference between the ordinary income tax rate and the long-term capital gains tax rate, the greater the potential tax savings of electing an NUA tax treatment of company stock.

Absolute NUA. The larger the dollar value of the stock's appreciation, the more the NUA rule can save you on taxes.

Percentage of NUA. An NUA that is a higher percentage of total market value creates greater potential tax savings because more of the proceeds will be taxed at the lower capital gains rate and less will be taxed at income tax rates.

Time horizon to distribution. The longer you plan to keep your assets invested in an IRA or taxable account before liquidating them, the greater the potential benefit of tax-deferred growth, and therefore, the less you would benefit from NUA. A shorter time frame, on the other hand, makes the NUA election more attractive.

How NUA stock is generally taxed

2 scenarios: when does nua make sense.

Let's look at 2 hypothetical NUA scenarios. Both workers had long careers and contributed to their company's qualified retirement plan for many years. Both are faced with sizable tax bills on their account balances.

Scenario 1: Utilize NUA and buy down the basis now to save on taxes in retirement

Here's a hypothetical scenario where NUA makes sense. After a 40-year career in the defense industry, Tony, age 67, recently retired with $2 million in his 401(k). He is widowed and currently in the 24% federal tax bracket. About half of Tony's $2 million nest egg is company stock worth approximately $1 million. Because he participated in the company's plan for many years and purchased the stock at low share prices over time (the average basis vs. the current share price), the actual cost basis of his company stock is only $50,000.

While still working earlier this year, Tony, whose recent annual salary was $100,000, made a $40,000 after-tax contribution to his 401(k) to buy down the basis of his company stock. Under his company's retirement plan rules, he is allowed to use this money to reduce the baseline value on which taxes will be based, allowing his taxable income to stay in the 24% federal tax bracket. If he has made after-tax contributions, that tax basis will automatically ascribe to anything he doesn't directly roll over when he takes the full payout, including the stock.

When Tony's required minimum distributions (RMDs) start in a few years, he's projected to be in the 22% federal tax bracket. To take advantage of NUA, after he retired this year, he requested a full distribution of his 401(k) account, sending the company stock in-kind to a taxable brokerage account, and directly rolling over the rest to an IRA. Now, he'll only pay tax at the ordinary income rate on $10,000 worth of the basis on the company stock, and he won’t be taxed on the gain on the company stock, valued at $1 million, until he sells it. The other $1 million or so stays in the IRA to pay for future retirement expenses or to give away to charities and family.

Down the road when Tony passes away, if he hasn't yet sold the company stock, his children can receive a step-up in basis on any gain since Tony transferred the employer stock into his taxable account; however, the remaining portion of the NUA is considered "income in respect of a decedent" and is still taxable as a long-term capital gain when eventually sold by Tony’s kids. Additionally, Tony's estate may be subject to estate tax in the year he passes, and the children may be subject to inheritance tax, if applicable for their state, when they inherit the company stock.

"Like a Roth conversion, NUAs should be realized primarily because you want to pay a lower tax rate on assets in the future by paying some taxes in the present," explains Pomerance. “You also are able to potentially reduce future RMDs by getting the assets out of the retirement plan accounts.”

Scenario 2: Don't utilize an NUA approach because taxes are estimated to be lower in the future

In some scenarios, however, income in retirement may be much lower than the current level and the effective ordinary income tax rate may be lower, so the investor may be better off not doing an NUA but by simply rolling the company stock directly into an IRA.

In the following hypothetical scenario, consider Irwin, age 65. He's had a long career in biotech as a senior executive and earns about $500,000 a year, putting him in the estimated federal tax bracket of 35%.

He just retired from one company with $2,500,000 in his 401(k) plan, of which $500,000 was invested in company stock. NUA is $250,000. Although that's a nice nest egg, Irwin is at the peak of his earnings capacity, loves what he does, and will almost certainly continue working for another 5 years after he leaves his current position and company this year.

Looking a few years down the road, Irwin would retire at age 70 and would have estimated RMDs of approximately $162,000 at age 73. That should put him in the 22% federal tax bracket vs. his current tax bracket of 35%.

In Irwin's case, if he exercised NUA, it would put him in a 37% bracket today and further increase the taxes to be paid on NUA. So NUA doesn't make sense, given his high level of current income, along with the anticipation that his tax bracket will likely be lower in the future.

Is NUA right for me?

It generally makes sense to utilize NUA when you believe your current tax rate is the same or lower than what you expect it to be in the future. Consider the following 3 conditions, which may indicate that your income will not fall sharply in the future and may even rise:

If yes is answered to all 3 conditions, an NUA may be to your advantage, although it’s no guarantee, so be sure to consult with a tax or financial planning professional regarding your personal situation before making any decisions.

"In general, it's important to work out the various tax scenarios because you'll eventually have to pay taxes on gains from selling company stock," says Pomerance. "However, you don't want to let taxes dictate investing decisions. Working with your Fidelity financial professional or on your own, make sure to first consider the sale of NUAs in light of your asset allocation, cash flow needs, and long-term retirement goals—then consult your tax professional to make the determination if this tax strategy makes sense for you."

How to qualify for NUA tax treatment

You must meet all 4 of the following criteria to take advantage of the NUA rules:

"The IRS enforces these rules strictly," says Pomerance. "If you do not meet one of the criteria—for example, if you fail to distribute all assets within one tax year—your NUA election will be disqualified, and you would owe ordinary income taxes and any penalty on the entire amount of the company stock distribution."

Tip: For more information on these complex rules, as well as situations that trigger additional tax restrictions, review IRS Publication 575, Pension and Annuity Income.

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Stock Assignment: Transferring Ownership Rights with Stock Power

1. introduction to stock assignment and stock power, 2. understanding ownership rights in stock, 3. the role of stock power in transferring ownership, 4. ways to obtain stock power, 5. filling out a stock power form, 6. executing a stock assignment, 7. legal considerations in stock assignment, 8. common mistakes to avoid in stock assignment, 9. conclusion and final thoughts on stock power and stock assignment.

Stock Assignment and Stock Power are two terms that are commonly used in the world of stocks and investments. They are often used interchangeably, but they refer to two different things. Stock assignment is the process of transferring ownership rights of a stock from one party to another, while Stock Power is a legal document that authorizes the transfer of ownership rights from one party to another. In this section, we will discuss in detail what Stock Assignment and Stock Power are, how they work, and why they are important.

1. What is Stock Assignment?

Stock Assignment refers to the transfer of ownership rights of a stock from one party to another. This process is typically used when an investor wants to sell their shares to someone else. The seller must sign an Assignment of Stock Certificate form, which is a legal document that transfers ownership rights to the buyer . The buyer must then present the form to the company's transfer agent, who will update the company's records to reflect the change in ownership.

2. What is Stock Power?

Stock Power is a legal document that authorizes the transfer of ownership rights from one party to another. It is typically used when an investor wants to transfer their shares to a family member or a trust. The seller must sign a stock Power form , which is a legal document that authorizes the transfer of ownership rights to the buyer. The buyer must then present the form to the company's transfer agent, who will update the company's records to reflect the change in ownership.

3. What are the differences between Stock Assignment and Stock Power?

The main difference between Stock Assignment and Stock Power is the purpose for which they are used. Stock Assignment is used when an investor wants to sell their shares to someone else, while Stock Power is used when an investor wants to transfer their shares to a family member or a trust. Another difference is the legal document that is used. Stock Assignment uses an Assignment of Stock Certificate form, while Stock Power uses a Stock Power form.

4. What are the benefits of Stock Assignment and Stock Power?

The main benefit of Stock Assignment and Stock Power is that they provide a legal framework for transferring ownership rights of a stock from one party to another. This ensures that the transfer is done legally and that the new owner has full ownership rights to the stock. It also ensures that the company's records are updated to reflect the change in ownership, which is important for tax purposes.

5. What are the risks of Stock Assignment and Stock Power?

The main risk of Stock Assignment and Stock Power is that they can be used for fraudulent purposes. For example, someone could forge an Assignment of Stock Certificate or a Stock Power form to transfer ownership rights of a stock to themselves. To mitigate this risk, it is important to use a reputable transfer agent and to verify the authenticity of the legal documents.

6. Which option is better: Stock Assignment or Stock Power?

The choice between Stock Assignment and Stock Power depends on the purpose for which they are being used. If an investor wants to sell their shares to someone else, then Stock Assignment is the better option. If an investor wants to transfer their shares to a family member or a trust, then Stock Power is the better option. It is important to use the correct legal document and to ensure that the transfer is done legally to avoid any potential risks .

Introduction to Stock Assignment and Stock Power - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to owning stock, it's important to understand the concept of ownership rights. Ownership rights refer to the various privileges that come with owning stock, such as voting rights and the ability to receive dividends. Understanding these rights is crucial for investors who want to make informed decisions about their investments. In this section, we'll take a closer look at ownership rights in stock and what they mean for investors.

1. Voting Rights

One of the most important ownership rights in stock is the right to vote. When you own stock in a company, you are entitled to vote on certain matters that affect the company. These matters can include electing members to the board of directors, approving mergers or acquisitions, and making changes to the company's bylaws. The number of votes you have is typically based on the number of shares you own. For example, if a company has 1,000 shares outstanding and you own 100 shares, you would have 10% of the voting power.

2. Dividend Rights

Another ownership right in stock is the right to receive dividends. Dividends are payments made by a company to its shareholders, usually on a quarterly basis. The amount of the dividend is typically based on the company's profits and can vary from year to year. If you own stock in a company that pays dividends, you are entitled to a portion of those payments based on the number of shares you own.

3. Liquidation Rights

If a company goes bankrupt or is liquidated, shareholders have the right to a portion of the company's assets. This is known as liquidation rights. However, in most cases, shareholders are the last in line to receive payment after creditors and other stakeholders have been paid.

4. Preemptive Rights

Preemptive rights refer to the right of existing shareholders to purchase additional shares in a company before they are offered to the public. This allows shareholders to maintain their ownership percentage in the company and prevent dilution of their shares.

5. Transferability of Ownership Rights

Ownership rights in stock are transferable, meaning you can sell your shares to another investor. When you sell your shares, you transfer your ownership rights to the buyer. However, it's important to note that some ownership rights, such as voting rights, may be restricted for a period of time after the sale.

Understanding ownership rights in stock is crucial for investors who want to make informed decisions about their investments. Voting rights, dividend rights, liquidation rights, preemptive rights, and transferability of ownership rights are all important concepts to understand. When considering investing in a company, it's important to evaluate these ownership rights and consider the potential risks and rewards .

Understanding Ownership Rights in Stock - Stock Assignment: Transferring Ownership Rights with Stock Power

Stock power plays a crucial role in transferring ownership of stocks from one person to another. Without it, the process would be more complicated and time-consuming. In this section, we will explore the different aspects of stock power and its importance in transferring ownership.

1. Definition of Stock Power: A stock power is a legal document that authorizes the transfer of ownership of a stock from the owner (the "grantor") to another person or entity (the "grantee"). It is also known as a stock assignment or a stock power form. The stock power form contains the details of the stock being transferred, the name of the grantee, and the signature of the grantor.

2. importance of Stock power : Stock power is important because it provides proof of ownership transfer and protects both the grantor and the grantee. With a stock power, the grantor can transfer ownership of the stock without physically delivering the stock certificate. This avoids the risk of loss or theft of the stock certificate. On the other hand, the grantee can prove ownership of the stock through the stock power, which is crucial for selling the stock or receiving dividends.

3. Types of stock Power forms : There are two types of stock power forms: "blank" and "special." A blank stock power form is unsigned and does not specify the name of the grantee. It is commonly used for transferring ownership of stocks to a brokerage firm or for depositing the stocks into a trust account. A special stock power form is signed and specifies the name of the grantee. It is used for transferring ownership of stocks to a specific person or entity.

4. How to Fill Out a Stock Power Form: Filling out a stock power form is a simple process. The grantor needs to sign the form and specify the name of the grantee. The grantee also needs to sign the form to acknowledge receipt of the stock. The completed form should be sent to the transfer agent or the brokerage firm that handles the stock.

5. Alternatives to Stock Power: While stock power is the most common way to transfer ownership of stocks, there are alternatives. One option is to use a trust. The grantor can transfer the stock to a trust and name the grantee as the beneficiary. The grantee will receive the stock upon the grantor's death. Another option is to use a will. The grantor can specify in the will that the stock should be transferred to the grantee upon the grantor's death.

Stock power plays an important role in transferring ownership of stocks. It provides proof of ownership transfer and protects both the grantor and the grantee. There are different types of stock power forms, and filling them out is a simple process. While there are alternatives to stock power, it is the most common way to transfer ownership of stocks.

The Role of Stock Power in Transferring Ownership - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to transferring ownership rights with stock power , there are various ways to obtain this crucial document. Whether you are a shareholder looking to transfer your ownership or a company seeking to issue new shares, understanding the different methods available can help streamline the process and ensure a smooth transition of ownership. In this section, we will explore some common ways to obtain stock power, providing insights from different perspectives and comparing several options to determine the best approach.

1. Directly from the Transfer Agent:

One of the most straightforward ways to obtain stock power is by contacting the transfer agent directly. The transfer agent is responsible for maintaining the shareholder records and managing the transfer of ownership. They can provide you with the necessary stock power forms, which typically need to be completed, signed, and notarized before submitting them back to the transfer agent. This method ensures that the required documentation is obtained directly from the authorized party, reducing the risk of errors or fraudulent activity.

2. Online Stock Power Forms:

In today's digital era, many companies offer the convenience of online stock power forms. Shareholders can access these forms through the company's website or a designated platform. Online forms often include step-by-step instructions and may even provide a notary service. This option can save time and effort, as there is no need for physical paperwork or mailing documents. However, it is essential to ensure the online platform is secure and trustworthy, protecting sensitive information from potential cyber threats.

3. Brokerage Firms:

If you hold your shares through a brokerage account, you can obtain stock power through your broker. Brokerage firms typically have their own procedures for transferring ownership and may require specific forms or documentation. Contact your broker to inquire about the process and any associated fees. While this option may be convenient for shareholders who already have a brokerage account, it may not be the best choice for those who prefer a direct relationship with the transfer agent or have shares held outside of a brokerage account.

4. In-person at a Financial Institution:

Some shareholders may prefer to obtain stock power in person, either at their bank or another financial institution . This option allows for face-to-face interaction and immediate access to the necessary forms. However, not all financial institutions offer this service, so it is important to check beforehand. Additionally, consider any associated fees and potential time constraints when opting for this method.

Comparing the different ways to obtain stock power, the best option ultimately depends on your specific circumstances and preferences. If you have a direct relationship with the transfer agent, obtaining stock power directly from them ensures accuracy and eliminates potential intermediaries. On the other hand, online stock power forms can offer convenience and ease of use, particularly for tech-savvy individuals. Brokerage firms provide a viable option for those already utilizing their services, while in-person visits to financial institutions may be preferred by individuals seeking a personal touch.

Understanding the various ways to obtain stock power is crucial for shareholders and companies alike. By exploring the options available and considering the specific requirements and preferences, individuals can choose the most suitable method to transfer ownership rights efficiently and securely.

Ways to Obtain Stock Power - Stock Assignment: Transferring Ownership Rights with Stock Power

When transferring ownership rights with a stock power, there are several important steps to follow. Filling out the stock power form is one of the most crucial steps in this process, as it legally transfers ownership of the stock from one party to another. In this section, we will explore the process of filling out a stock power form, including what information is required, how to properly fill it out, and what to do after it is completed.

1. Understanding the Stock Power Form

A stock power form is a legal document that is used to transfer ownership of stock from one party to another. It is typically used in situations where the actual stock certificate is not available, such as when the stock is held in a brokerage account. The stock power form contains important information about the stock, such as the name of the company, the number of shares being transferred, and the name of the current owner.

2. Gathering the Required Information

Before filling out the stock power form, it is important to gather all of the necessary information. This may include the name of the company that issued the stock, the number of shares being transferred, and the name and contact information of the current owner. It is also important to have the recipient's information on hand, including their name and contact information.

3. Filling Out the Form

When filling out the stock power form, it is important to be accurate and thorough. The form will typically ask for the name and address of the current owner, as well as the name and address of the recipient. It may also ask for the number of shares being transferred, the date of the transfer, and other relevant information. It is important to double-check all of the information before submitting the form.

4. Submitting the Form

Once the stock power form has been filled out, it should be signed and dated by the current owner. Depending on the situation, the form may need to be notarized or witnessed by a third party. The completed form should be submitted to the appropriate parties, such as the brokerage firm or transfer agent.

5. Considerations When Filling Out a Stock Power Form

When filling out a stock power form, it is important to consider several factors. For example, if the stock is being transferred as a gift, it may be subject to gift taxes. It is also important to consider any restrictions or limitations on the transfer of the stock, such as those imposed by the company or by applicable laws and regulations.

6. Best Practices for Filling Out a Stock Power Form

To ensure that the stock power form is filled out correctly and completely, it is important to follow best practices. This may include reviewing the form carefully before submitting it, double-checking all of the information, and seeking professional advice if necessary. It is also important to keep copies of all relevant documents, such as the stock power form and any supporting documentation.

Filling out a stock power form is an important step in transferring ownership rights with a stock power. By following the steps outlined above and considering the relevant factors, it is possible to ensure that the transfer is completed correctly and legally.

Filling out a Stock Power Form - Stock Assignment: Transferring Ownership Rights with Stock Power

Executing a stock assignment is a process that involves transferring ownership rights from one party to another. It is a crucial step in the stock transfer process, and it requires both the assignor and the assignee to follow specific procedures to ensure a smooth transfer of ownership . In this section, we will explore the steps involved in executing a stock assignment and some insights from different points of view.

1. Review the Stock Power Form

Before executing a stock assignment, it is essential to review the stock power form carefully. This document is a legal instrument that transfers ownership rights from the assignor to the assignee. It contains important information, such as the name of the assignor, the name of the assignee, the number of shares being transferred, and the date of the transfer. Both the assignor and the assignee must sign the stock power form in the presence of a notary public.

2. Choose the Right Type of Stock Assignment

There are two types of stock assignments: a full assignment and a limited assignment. A full assignment transfers all ownership rights from the assignor to the assignee, while a limited assignment transfers only specific ownership rights, such as the right to vote or receive dividends. The type of stock assignment you choose depends on your specific needs and circumstances.

3. Consider the Tax Implications

Executing a stock assignment may have tax implications for both the assignor and the assignee. The assignor may be subject to capital gains tax if the stock has appreciated in value since it was acquired. The assignee may be subject to income tax if they receive dividends or sell the stock at a profit. It is important to consult with a tax professional to understand the tax implications of executing a stock assignment.

4. Choose the Right Method of Transfer

There are several methods of transferring ownership rights, including physical delivery, book-entry transfer, and electronic transfer. Physical delivery involves the physical delivery of stock certificates from the assignor to the assignee. Book-entry transfer involves the transfer of ownership rights through an intermediary, such as a stock transfer agent . Electronic transfer involves the transfer of ownership rights through an electronic network, such as the Depository Trust Company (DTC). The method of transfer you choose depends on your specific needs and circumstances.

5. seek Professional assistance

Executing a stock assignment can be a complex process, and it is advisable to seek professional assistance. A stock transfer agent can help you navigate the transfer process and ensure that all necessary procedures are followed. A tax professional can help you understand the tax implications of executing a stock assignment. Seeking professional assistance can help ensure a smooth transfer of ownership rights.

Executing a stock assignment is an essential step in transferring ownership rights from one party to another. It requires careful consideration of the stock power form, the type of stock assignment, the tax implications, the method of transfer, and professional assistance. By following these steps, you can ensure a smooth transfer of ownership rights.

Executing a Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

When transferring ownership rights with a stock power, legal considerations must be taken into account to ensure a smooth and legally valid transaction. These considerations can vary depending on the type of stock being transferred and the parties involved. Here are some of the key legal considerations to keep in mind:

1. Type of Stock: The type of stock being transferred will impact the legal requirements for the transfer . For example, transferring common stock may require different legal documentation than transferring preferred stock. It's important to understand the specific requirements for the type of stock being transferred.

2. Parties Involved: The parties involved in the transfer will also impact the legal considerations . For example, transferring stock between family members may require different documentation than transferring stock between unrelated parties. It's important to understand the legal requirements based on the parties involved.

3. Tax Implications: The transfer of stock ownership can have tax implications for both the transferor and transferee. It's important to understand the tax consequences of the transfer and to consult with a tax professional if necessary.

4. Securities Laws: The transfer of stock ownership is subject to certain securities laws, including the securities act of 1933 and the Securities Exchange Act of 1934. These laws regulate the sale and transfer of securities and may require certain disclosures or filings.

5. State Laws: State laws may also impact the transfer of stock ownership. For example, some states require specific documentation or filings for stock transfers. It's important to understand the state laws that apply to the transfer.

When considering the legal considerations for stock assignment, it's important to consult with a legal professional to ensure compliance with all applicable laws and regulations. A legal professional can also help determine the best option for transferring ownership rights with a stock power.

Options for transferring ownership rights with a stock power include:

1. Direct Transfer: A direct transfer involves transferring the stock from one party to another without the involvement of a broker or intermediary. This option may be simpler and less expensive, but may require more legal documentation and may not be available for all types of stock.

2. Broker-Assisted Transfer: A broker-assisted transfer involves using a broker to facilitate the transfer of stock ownership. This option may be more expensive, but may be easier and more efficient, particularly for larger transfers or transfers involving multiple parties.

3. Gift Transfer: A gift transfer involves transferring ownership of the stock as a gift. This option may have tax implications for the transferor and transferee and may require additional legal documentation.

Ultimately, the best option for transferring ownership rights with a stock power will depend on the specific circumstances of the transfer. Consulting with a legal professional can help determine the most appropriate option and ensure compliance with all applicable legal requirements.

Legal Considerations in Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to stock assignment, there are several mistakes that people make which can lead to legal and financial complications. It is important to understand the process of transferring ownership rights with stock power and avoid these common mistakes.

1. Failing to Complete the Stock Assignment Form Correctly

One of the most common mistakes made in stock assignment is failing to complete the stock assignment form correctly. This can lead to delays in the transfer of ownership rights and can result in legal complications. It is important to ensure that all the required fields are filled out correctly and that the form is signed and dated by the appropriate parties.

2. Not Having a Properly Endorsed Stock Certificate

Another mistake that people make is not having a properly endorsed stock certificate. This is important because the stock certificate is the physical representation of the ownership rights of the stock. It is important to ensure that the certificate is properly endorsed by the seller and that the buyer has the certificate in their possession.

3. Not understanding the Tax implications of Stock Assignment

Another mistake that people make is not understanding the tax implications of stock assignment. Depending on the circumstances, there may be tax implications for both the buyer and the seller. It is important to consult with a tax professional to understand the tax implications before completing the stock assignment.

4. Not Using a Broker or Transfer Agent

Some people try to complete the stock assignment themselves without using a broker or transfer agent. This can lead to complications and delays in the transfer of ownership rights. It is recommended to use a broker or transfer agent to ensure that the process is completed correctly and efficiently.

5. Not Verifying the Identity of the Buyer or Seller

Finally, it is important to verify the identity of the buyer or seller before completing the stock assignment. This can help to prevent fraud and ensure that the transfer of ownership rights is legitimate. It is recommended to use a reputable broker or transfer agent who can help with this process.

Stock assignment can be a complicated process, but by avoiding these common mistakes, it can be completed successfully. It is important to ensure that the stock assignment form is completed correctly, that the stock certificate is properly endorsed, that the tax implications are understood, and that a reputable broker or transfer agent is used. By following these guidelines, the transfer of ownership rights can be completed efficiently and without complications.

Common Mistakes to Avoid in Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

Stock Power and Stock Assignment are important concepts in the world of finance and investment. These concepts help investors transfer ownership rights of their stocks to another party. In this blog post, we have discussed the details of these concepts and their implications. We have also analyzed the different perspectives and provided insights on how to use these concepts effectively.

1. Importance of Stock Power and Stock Assignment

Stock Power and Stock Assignment are essential tools for investors who want to transfer ownership rights of their stocks to another party. These concepts enable investors to transfer their stocks without having to go through the hassle of selling them. This is particularly useful in cases where the investor wants to gift the stocks to someone or transfer them to another account.

2. Understanding Stock Power

Stock Power is a legal document that enables the transfer of ownership rights of a stock from one party to another. It is an endorsement that is required by the brokerage firm to transfer the ownership of the stock. The stock power must be signed by the owner of the stock and must be submitted along with the certificate of the stock to the brokerage firm.

3. Understanding Stock Assignment

Stock Assignment is a process where the ownership rights of a stock are transferred from one party to another. The process involves filling out a transfer form and submitting it to the brokerage firm. The transfer form must be signed by the owner of the stock and must be submitted along with the certificate of the stock.

4. pros and Cons of stock Power and Stock Assignment

Stock Power and Stock Assignment have their own advantages and disadvantages. Stock Power is a simpler process that requires the submission of a single document, whereas Stock Assignment involves filling out a transfer form. However, Stock Power can only be used if the certificate of the stock is in the possession of the owner, whereas Stock Assignment can be used even if the certificate is lost or misplaced.

5. Best Option

The best option depends on the situation. If the certificate of the stock is in the possession of the owner, Stock Power is the best option. However, if the certificate is lost or misplaced, Stock Assignment is the better option. In any case, it is important to consult with the brokerage firm to determine the best option.

Stock Power and Stock Assignment are important concepts that enable investors to transfer ownership rights of their stocks. These concepts have their own advantages and disadvantages, and the best option depends on the situation. It is important to consult with the brokerage firm to determine the best option.

Conclusion and Final Thoughts on Stock Power and Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

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Asgn incorporated (asgn).

• Previous Close 96.50
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ASGN Incorporated Overview Information Technology Services / Technology

ASGN Incorporated engages in the provision of information technology (IT) services and solutions in the technology, digital, and creative fields for commercial and government sectors in the United States, Canada, and Europe. It operates through two segments: Commercial and Federal Government. The Commercial Segment provides consulting, creative digital marketing, and permanent placement services primarily to enterprise clients. This segment also offers workforce mobilization, modern enterprise, and digital innovation IT consulting services; and cloud, data and analytics, and digital transformation solutions. The Federal Government Segment provides mission-critical solutions to the department of defense, intelligence communities, and federal civilian agencies. This segment offers cloud, cybersecurity, artificial intelligence, machine learning, application and IT modernization, and science and engineering solutions. The company was formerly known as On Assignment, Inc. and changed its name to ASGN Incorporated in April 2018. ASGN Incorporated was founded in 1985 and is based in Glen Allen, Virginia.

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How to Transfer Shares of Stock Within a Corporation?

Knowing how to transfer shares of stock within a corporation is important for business owners. The ownership percentage is determined by the shares. 3 min read updated on February 01, 2023

Updated July 8, 2020:

Knowing how to transfer shares of stock within a corporation is important for business owners. A person's percentage of ownership in a company is determined by the shares they hold. The respective shares can be sold or given by their owners however they see fit, as long as it complies with the shareholder agreements they signed prior to the transfer.

Stock Transfers

Shares can be transferred through different types of business entities, such as corporations, partnerships or limited liability companies. Each entity has a different share structure, share transfer guidelines, and maximum number of shareholders.

Most companies have share transfer guidelines and written agreements between owners, clearly specifying how the share value is calculated and who may or may not own shares in that respective company. Although all corporations should have these agreements, not all of them do.

If such an agreement does not exist, a person must realistically value its stock before transferring it, in order to comply with IRS rules and state corporation laws.

Once the presence or lack of an agreement is determined, a purchase agreement needs to be created to complete the share transfer. This document clearly outlines all the details regarding the transfer. Once this legal document has been signed, the share certificates need to specify their new owner's name.

Transferring an S Corporation's Shares

An S corporation is a business that complies with a specific set of regulations to benefit from a special tax regime offered by the IRS. One of the most important regulations includes a restriction on who can own stock in the company. Not complying can mean losing tax privileges.

Any well run S corporation should be careful to restrict stock transfers in order to avoid accidentally transferring stock to an ineligible party and therefore losing the special tax status. In order to transfer stock properly, there are several steps that need to be taken:

• Find out if the S corporation has a shareholders' agreement in place
• Determine the correct price for the stock. If an agreement is in place, it may specify the price you can charge for your stock. If there is no agreement, you will need to determine the company's total value and determine the price of your stock based on what percentage of the entire company your shares represent.
• The next step is determining whether the party you wish to sell your shares to is allowed to own stock in that company. Shares in S companies may only be owned by citizens or residents, or by certain entities, not including partnerships or other corporations.
• A sales agreement must be drafted, clearly specifying the parties involved, the price of the stock, and how much of it will be purchased.
• Another important clause in the sale agreement is the buying entity agreeing to fully respect the S corporation's internal laws and shareholder agreements already in place.
• Finally, both parties need to sign the document and keep a copy for tax purposes.
• If all steps are properly taken, the company's board of directors will acknowledge the new ownership of the respective stocks and document the date, price, and other details of the transaction.

The Stock Transfer Ledger

An important document for any corporation is the stock transfer ledger which effectively keeps track of all details regarding the institution's shares and their owners. Such a document often includes the following clauses:

• The name of the initial owner of the shares
• The initial owner's address
• The exact date when they became shareholder
• The certificate number for their shares
• How much stock they own in the company
• How they initially obtained the shares
• Details regarding the sum of money paid for the shares
• The date when the transfer occurred
• Who the new owner will be
• How many shares there are in total
• How many shares exist outside the respective transaction
• Amount of taxes due following the transaction.

The ledger is useful for any action regarding the shares, such as sale, transfer, or loss. Due to its obvious importance for a corporation, the ledger is kept by the corporation's secretary, along with other crucial documents like the corporate seal.

If you need help with transferring shares of stock within a company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

• What is Stock Corporation?
• Corporate Stock Transfer Agreement
• Authorized Stock
• Stock Corporation
• Stock Ledger
• How to Issue Shares in a Company
• Authorized Shares
• Issuance of Stock
• S Corp Shares
• Issuing Shares in an S Corporation: What You Need to Know

How to Transfer Corporation Shares into a Trust

Are you an executor or trustee?

Want to get organized, want to offer estate planning, need a will or trust.

Transferring corporation shares into a trust is an effective way to manage and protect your assets, both in your lifetime and beyond. The process involves several steps, which, although complex, can provide significant benefits in terms of tax advantages, asset protection, and estate planning. This blog post will guide you through the process of transferring corporation shares into a trust.

Understanding Trusts

A trust is a legal arrangement where a trustee holds and manages assets for the benefit of a third party, known as the beneficiary. Trusts can be classified broadly as revocable or irrevocable, with each offering unique advantages. Trusts not only provide a means to manage your assets but also offer legal protection and can help avoid the lengthy and costly probate process.

Why Transfer Corporation Shares into a Trust?

There are several reasons to transfer corporation shares into a trust. It can provide a mechanism for seamless succession planning, ensuring the shares are managed according to your wishes after your death. Additionally, it can offer potential tax benefits and protect the shares from creditors. It also avoids the probate process, saving time, money, and maintaining privacy.

Setting Up a Trust for Corporation Shares

• Choose the type of trust: Depending on your goals, choose between a revocable trust, which can be altered or canceled, or an irrevocable trust, which cannot be changed without the consent of the trustee.
• Select a trustee: This individual or entity will manage the trust's assets. Choose someone you trust and who is competent to handle financial matters.
• Create the trust document: This outlines the terms of the trust, such as the beneficiaries and the trustee's responsibilities.
• Fund the trust: This involves transferring your assets, in this case, corporation shares, into the trust.

Transferring Corporation Shares into a Trust

• Verify share transferability: Some shares have restrictions on their transferability. Thus, it's vital to verify if your corporation's bylaws or shareholder agreement allow for such transfers.
• Prepare a stock assignment: This document transfers the shares from your name to the trust. You'll need to sign this in the presence of a notary public.
• Update the corporation's stock ledger: The ledger should reflect the trust as the new owner of the shares.
• Issuing a new stock certificate: The new certificate should be issued in the name of the trust.

Seeking Professional Help

Given the complex nature of transferring corporation shares into a trust, it's advisable to seek the help of an experienced attorney or financial advisor. They can guide you through the process, ensure all legal requirements are met, and provide advice on potential tax implications.

Transferring corporation shares into a trust is a significant step in asset management and protection. While the process may seem daunting, with the right guidance and careful planning, it can offer you peace of mind and substantial benefits.

Get a plan, get Snug.

Stock Transfer Agreement

Jump to section, what is a stock transfer agreement.

A stock transfer agreement is a legal document between shareholders and another party that provides the right to sell or transfer shares of stock at a predetermined price.

A stock transfer agreement can be used when there are more than two parties involved in the sale of stocks, or for any time there is a need to specify which party has what rights if they are not already specified by law. The most common use for this type of agreement is when one company buys another company's assets. This ensures that all shareholders know which entity will have control over their shares after the transaction takes place. It also helps ensure that each shareholder will receive fair compensation based on how many shares they own, and protects against certain types of lawsuits from being filed against either side in the future.

Common Sections in Stock Transfer Agreements

Below is a list of common sections included in Stock Transfer Agreements. These sections are linked to the below sample agreement for you to explore.

Stock Transfer Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.0 2 dex100.htm STOCK TRANSFER AGREEMENT , Viewed September 27, 2021, View Source on SEC .

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Lawyers with backgrounds working on stock transfer agreements work with clients to help. Do you need help with a stock transfer agreement?

Post a project  in ContractsCounsel's marketplace to get free bids from lawyers to draft, review, or negotiate stock transfer agreements. All lawyers are vetted by our team and peer reviewed by our customers for you to explore before hiring.

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Ms. Ayub is an attorney licensed to practice in Texas. Before moving to the US, she has a number of years of experience in contract review, analysis and drafting. Ms. Ayub is available to help you with your legal problems, as well as filling LLC and other business entity formation documents. To know more about her practice, please visit https://ayublawfirmpllc.com/.

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I began my career at "big law" firms, worked in-house for 14 years, and now have my own practice, providing big law quality at small firm rates. My practice focuses on strategic and commercial transactions, including M&A, preferred stock and common stock offerings, asset purchases and sales, joint ventures and strategic partnerships, stock option plans, master services agreements and SOWs, software development and license agreements, SaaS agreements, NDAs, employment and consulting agreements. I also manage corporate governance, advise boards and executives, and act as outside general counsel. I represent clients across the country and around the world.

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Curt Brown has experience advising clients on a variety of franchising, business litigation, transactional, and securities law matters. Mr. Brown's accolades include: - Super Lawyers Rising Star - California Lawyer of the Year by The Daily Journal - Pro Bono Attorney of the Year the USC Public Interest Law Fund Curt started his legal career in the Los Angeles office of the prestigious firm of Irell & Manella LLP, where his practice focused on a wide variety of complex civil litigation matters, including securities litigation, antitrust, trademark, bankruptcy, and class action defense. Mr. Brown also has experience advising mergers and acquisitions and international companies concerning cyber liability and class action defense. He is admitted in California, Florida, D.C., Washington, Illinois, Colorado, and Michigan.

I have been a business and real estate attorney for 38 years. I handle both transactional and litigation matters.

I am a New York attorney with 10 years as a licensed attorney and over 7 years of experience working with technology companies in the startup global ecosystem. I have direct experience advising global startups on the legal, regulatory, technology and policy issues that affect their business and competitive strategy. I am a multifaceted, globally-minded Attorney and Business Strategist who is changing the perspective of the law in business from a reactive need to a proactive tool. My legal & business strategic skill-set provides robust, forward-thinking, and solution-oriented legal services in the following areas: Drafting, Reviewing, and Negotiating (Redlining) various commercial contracts and licensing agreements; Drafting and Reviewing Employment Contracts; Contract Management using Contract Management Software; Influencer Marketing Intellectual Property Law (excluding Patent law); and Data Privacy such as GDPR, CCPA/CPRA, LGPD, and HIPAA; and Cybersecurity Law, including creating privacy by design frameworks. NOTABLE ACHIEVEMENTS: Recently achieved certifications in Ironclad Contract Management Software/Lifecycle Management, specifically: Contract Owner; Core Administration; Procurement Workflow; Sales Workflow; and Clickwrap Core Administration; Contributed to the creation of new jurisprudence in international administrative and international employment law; Drove high level contract negotiations in an international capacity where I achieved positive results for my client; and Achieved competency in Business Strategy, Business Growth Strategy, Strategic Planning and Execution, and Advanced Competitive Strategy, resulting in the publication of my legal based business strategic frameworks by leading marketplace for best business practices.

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• Transferring Ownership of Stock within an S Corporation
• Modified: Dec 14, 2023

There is a saying that it is better to give than to receive, and that is certainly the case when it comes to transferring ownership of stock to someone else. Unfortunately, rules and regulations have made it hard for you to simply go through the process of gifting S Corp Stock to someone else. Regardless of whether you want to change the ownership percentage of your company, or transfer S Corp Stock to a family member, you must make sure you go through the process properly. Otherwise, you could incur numerous unnecessary taxes.

→ Free Download: S-Corp Stock Transfer Template [Access Now]

Can You Give Stock To Someone as a Gift?

Yes, you are allowed to give stock to a family member, or anyone else, as a gift. If you already own stocks and want to transfer them to somebody else, you will need to transfer the stocks from your brokerage account to someone else’s brokerage account. If the other person does not have an active brokerage account, they will need to open one.

The Pros and Cons of Gifting Stock

You need to be familiar with the pros and cons of gifting stock to somebody else. Some of the benefits include:

• If you gift stock to children, compounding interest over an additional 18 years can give them a great head start on life.
• If you gift stock to someone in a lower tax bracket, they might not have to pay as much money in taxes if they sell the shares.
• If you decide not to sell the stock yourself, you can avoid paying capital gains taxes, saving money.
• It could also be a great way for you to support a nonprofit organization.

On the other hand, there are a few drawbacks to gifting stock to someone as well. They include:

• Gifting stock to someone can be more complicated when compared to other gifts.
• The other person could still incur capital gains taxes.
• You might find that it is simply easier to open a custodial account and purchase stock on behalf of a family member.

Therefore, it is important to take a closer look at the details of the process.

How To Transfer S Corp Stock To Someone Else

If you would like to transfer stock to someone else, the exact step can vary depending on the brokerage you use. These are the general steps you need to follow:

• Talk to the other person to see if they have a brokerage account. They don’t necessarily have to have an account with your broker, but they need to have one they can use.
• You need to get the Account Details from the recipient. This includes the name of the receiving firm, the account number of your recipient, and the DTC number tied to the firm.
• You must authorize the transfer. Typically, you need to fill out a form and sign it. Here is an example form from Fidelity .
• Finally, you will need to wait for the transfer to be completed. It can take a week or two for the process to be finalized.

By avoiding the sale of S Corporation stock to another shareholder, you could save money on taxes.

Does the Recipient Pay Taxes on the Stock?

Typically, stock is only taxed when it is sold. Here is a table regarding capital gains taxes on stock sales in the United States:

Follow the corporation’s explicit stock transfer processes

Refer to the corporation’s bylaws or buy-sell agreement between the shareholders and the transfer of shareholder ownership. Many well-run S corporations limit stock transfers to preserve a corporation’s sub-chapter from any revocation via the accidental stock transfer to ineligible parties. An S corporation might require third party approval to whom you want to transfer the stock. It also might prohibit the transfer altogether and instead require that you sell the stock back to the corporation. S corporations are unique in that the owners of the smaller businesses do not have to pay corporate tax, only individual. Because of this, however, the IRS has specific rules to follow when it comes to transferring shares.

Draft an agreement for the stock transfer

Set up the terms of a transfer, which may involve a sale of the shares in exchange for a gift of shares or money for no consideration. Per IRS requirements , an S corporation only is permitted to have 100 shareholders or less. Usually, the S corporation is privately held, not public, primarily because of the stock ownership limitations. Shares can’t be bought and sold on the open market with a stock exchange and broker. The parties of the transfer of S corporation shares agree to terms privately and draft a contract as a written agreement.

Execute the agreement then attain consideration

Both the shareholders and S corporation must sign the stock transfer contract. If an S corporation issues a paper stock certificate, the current owner must sign them over to a new owner. If shares are being sold, a buyer must transfer payment to a seller.

Record the transfer in the stock ledger of the corporation

The S corporation must maintain an accurate ledger of stock ownership within a company. The board of directors’ secretary must note the date of a transfer and sales price, then record the social security number and the contact information of the new owner.

Prepare to consent to an S corporation election

One requirement for sub-chapter S status is that every shareholder consents to the election in writing. A consent form includes a notarized declaration that a shareholder concurs that a company must be taxed under sub-chapter S. Once the new shareholder proxy signs the form, shareholder materials can be mailed and then filed in a corporation’s records.

Using a Stock Transfer Agent for your S Corp

If you are looking to better track and manage your S Corp shareholders, a transfer agent can do that for you.  Colonial Stock Transfer is an SEC-registered transfer agent and has been in good standing with the SEC for over 35 years.  Our stock transfer services will allow you to do the following:

• Track your investors in our investor and cap table management online platform
• Meet compliance regulations with SEC, IRS, and UCC code
• Allow investors can log in to our systems to see their stock holdings, transactions, account information, and more.
• Outsource full support for your shareholders to us

To get started, please contact us.

Learn more about our cap table management and transfer agent services.

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News & Insights

How Option Assignment Works: Understanding Options Assignment

May 26, 2023 — 08:00 am EDT

Written by [email protected] for Schaeffer  ->

Options assignment is a process in options trading that involves fulfilling the obligations of an options contract. 

It occurs when the buyer of an options contract exercises their right to buy or sell the underlying asset. The seller (writer) of the options contract must deliver or receive the underlying asset at the agreed-upon price (strike price).

What is Options Assignment?

Options assignment can happen when the owner of an option exercises their right to buy or sell shares of stock or when options expire in the money (ITM). This process can be complex and involves various factors such as the type of option, expiration date, and market conditions.

There are two main styles of options contracts: American-style and European-style. American-style options allow the buyer of a contract to exercise at any time during the life of the contract. In contrast, European-style options can only be exercised on the expiration date.

Traders selling American-style options are at risk of assignment anytime on or before the expiration date. While they can technically be assigned anytime, the option must be ITM for the owner of the contract to benefit from exercising their right. 

On the other hand, many options traders prefer to sell European-style options as it is impossible to be assigned before the expiration date, giving them more flexibility to hold their contract without worrying about being assigned early. 

Who is at Risk of Assignment in Options Trading?

Traders with short options positions are at risk of assignment because they have sold the option and are obligated to deliver or receive the underlying asset. If the owner of the options contract decides to exercise their rights, the seller of the options contract must fulfill their obligations.

Traders with long options positions are not at risk of assignment as they are in control of exercising their options. A long option holder has the right, but not the obligation, to buy or sell the underlying asset at the strike price. If the long option holder decides not to exercise their options, they can let the options contract expire worthless.

What is the Risk of Assignment?

The risks associated with options assignment are primarily centered around the obligations of the seller of the options contract. If the holder of the options contract decides to exercise their right to buy or sell the underlying asset, the seller must fulfill their obligations.

For example, if a trader sold a put option with a $100 strike price, and the stock dropped to $90, they would still have to buy the stock at $100 per share. When an option is ITM, it generally indicates that the seller of the option is in an unfavorable spot.

Of course, if you sold a $100 strike put option when the stock was trading at $120, and now it is trading at $90, the seller is likely regretting their original trade. However, it is impossible always to time the market perfectly, and assignment risk is the risk option sellers must assume. 

Traders must be aware of market conditions that could increase the risk of assignment, such as large price movements in the underlying asset. Option selling strategies benefit from a stable market environment, so you must ensure the stock you are trading will remain stable until the expiration date. Events that may cause significant market volatility, such as earnings, are crucial to be aware of when selling options. 

How to Avoid Option Assignment

While it may not be possible to avoid options assignment completely, there are several strategies that options traders can use to reduce the likelihood of being assigned.

One strategy is to manage short options positions by closing the position if your strike gets tested. For example, if you sold a $100 strike put when a stock is trading at $120 per share, you can avoid assignment by closing the position before the stock drops under your strike price of $100. 

Another strategy is to roll over your option, which means you close it out and simultaneously sell a new contract with a different strike price and/or date. Traders can roll their contracts to the same strike price at a further date or even roll it down or up to ensure their contract stays out of the money (OTM). 

These strategies may not always be effective in avoiding assignment. Traders should always be prepared to fulfill their obligations if they are assigned and have a plan to manage their positions accordingly. If a stock moves hard overnight, there is no guarantee you will successfully avoid assignment. 

Do You Keep the Premium if You Get Assigned?

Yes, if you get assigned on a short options position, you still keep the premium you received initially. However, it is important to note that if you are assigned, you will also be obligated to fulfill the contract terms by buying or selling the underlying asset at the strike price. This means you may incur additional costs associated with fulfilling your obligation, such as purchasing the underlying asset at an unfavorable price.

What Happens When Your Covered Call Gets Assigned?

If a covered call gets assigned, the seller of the call option must sell the underlying stock at the strike price to the buyer of the call option. The seller will still be able to keep the premium received from the sale of the call option.

For example, if you own a stock at $100 per share and sell a $130 strike call option, you will be forced to sell if the stock is above $130 on the expiration date. Additionally, you can be assigned before the expiration date if the stock is trading above your strike price. 

While the covered call seller will still generate a profit from this trade, the downside is you are likely missing out on more upside potential had you not sold the covered call. The seller of the covered call doesn’t have to do anything, as the broker will take care of the assignment for you. 

Are Options Automatically Assigned?

If you are an option seller, your option will either be exercised by the buyer or automatically assigned if it is ITM on the expiration date. 

If you are an option buyer, your option will not be automatically assigned before expiration. However, most brokers will automatically assign ITM options on the expiration date. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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• Net Realized Appreciation
• Avoid Required Distributions
• A Plus With Quick Stock Sales
• How NUA Can Save Taxes
• When NUA May Not Save You

Tips on Taking Advantage of NUA

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• Retirement Planning

Rolling Over Company Stock from a 401(k): When It Does—and Doesn't—Make Sense

You might do better moving the stocks to a taxable brokerage account

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

When employees leave a job that came with a company retirement plan, it's customary for them to roll over the balance in the plan's 401(k) into a traditional IRA . This allows the person to continue deferring taxes on the account's earnings until they retire and begin taking distributions.

Or it does, at least, for most of the plan's assets. But if your 401(k) includes publicly held stock in the company you're leaving, you shouldn't automatically roll these assets over to an IRA. It may make more sense to instead move the stock to a brokerage account and pay at least some tax on it immediately.

Here's a rundown of why that's the case, along with advice on how you should proceed in handling company stock when you depart a company. The explanation gets a little complex, but it's worth reading. Thousands of dollars in tax liability could be at stake.

Key Takeaway

• Rolling over your 401(k) money into an IRA can be a good way to defer taxes until you retire and begin to take distributions.
• But if your account includes publicly traded stock in the company you work for, you can save money by withdrawing it from your 401(k) and putting it in a taxable brokerage account.
• The difference between the stock's value when acquired and its current value, known as its net unrealized appreciation (NUA), is then subject only to capital gains tax, rather than the often higher income tax rate.
• The only part of your company stock that is subject to ordinary income taxes is the value of the stock when it was first bought by the 401(k) plan.
• This move also will help your heirs if they inherit the stock since they too will enjoy a more favorable tax treatment.

Net Realized Appreciation (NUA) Explained

The underlying reason to pause before rolling over company stock can be summarized in three letters: net unrealized appreciation (NUA). The NUA is the difference between the value of the company stock at the time it was purchased or given to you and put into your 401(k) account, and what it's worth when it's transferred out of the 401(k).

How that appreciation in the stock's value is ultimately taxed depends on the account to which the stock is transferred from your 401(k). If the transfer is to an IRA, you don't pay any tax immediately, which is helpful. But you're liable to pay income tax on the stock's full NUA when you sell it.

Moving the stocks to a brokerage account, on the other hand, requires you to pay income tax immediately on the cost basis of the stock—what it was worth when you acquired it. But there's a long-term advantage. When you eventually sell the stock, the NUA will be taxed as a capital gain, at rates that are lower than most pay in income tax.

If the stock has risen a lot in value, you could save thousands of dollars by paying income tax on the stock now and gaining a more favorable tax treatment for the remainder of its value when you sell the stock later.

Using NUA Helps Avoid Required Minimum Distributions

Avoiding an IRA transfer for your stock also allows you to skip being forced to disburse some of their value under the IRS rules for retirement accounts.

Company stock held within an IRA becomes subject, like all retirement account assets, to required minimum distributions (RMDs). That is, once you turn 73, a certain amount of the value of the account must be taken out annually. You may have to sell some of the company stock if you can't or don't wish to tap other assets in the account to satisfy the RMD requirement.

However, when you take advantage of the NUA tax break for your company stock (by not rolling it over into an IRA), you're free to sell the stock whenever you wish, since it will be free of the distributions demanded by an IRA.

NUA: A Plus With Quick Stock Sales

It's also advantageous to hold company stock outside an IRA if you wish to sell your company stock immediately after you depart the organization.

In general, you're required to hold stocks for a year before selling them to be eligible for taxation at the capital gains rate rather than at the income tax rate. Not so with stock that's been transferred from your retirement plan to a brokerage account. You'll be free to sell the shares the day after you transfer them out of your 401(k), and pay only the current capital gains rate on the NUA, rather than the income tax rate you'd pay if they were held in an IRA.

One caveat, though: This break does not apply to any further appreciation in the stock after it is transferred out of your 401(k). Let's say you decide to wait to sell because you believe the stock will rise further in value. Any such increase between the transfer from your 401(k) and the sale is subject to the usual rules for capital gains.

That is, the gain will be subject to income tax unless you hold the securities for more than one year before selling.

Any dividends earned on the stock before you sell it are also taxable at your ordinary income tax rate.

The proportion of American workers who have access to a retirement plan through their employer and choose to participate in the plan.

The Tax Benefit to Your Heirs

These same benefits flow to your heirs if they inherit company stock that was transferred by you from a 401(k) to a brokerage account. The heir can sell the stock immediately and pay capital gains tax on the proceeds, not income tax.

Further, your heir gets favorable treatment when it comes to how that gain is calculated.

The heir does not pay capital gains tax on the full appreciation in the stock's value from its original cost basis. The tax will only be on the appreciation since the stock was inherited.

The net result is that your heirs skip paying tax on any increase in the value of the stock during the time that you owned it. That would not necessarily be the case if they inherited the stock in an IRA rather than in a brokerage account.

To get the tax break that is available for company stock in a retirement plan, you'll have to pay some money upfront, which could discourage investors. But you'll most likely pay less taxes in the long run.

How NUA Can Save Taxes: A Case Study

Let's go through an example to demonstrate these tax treatments.

Mike is 57, about to retire, and has company stock in his 401(k) plan. The original value of the stock was $200,000, but it is now worth $1 million.

If he were to roll the $1 million over to his IRA, the money would grow tax-deferred until he took distributions. At that time, the distributions would be taxed as ordinary income.

If Mike doesn't sell the stock before he dies, the beneficiaries of his IRA will pay ordinary income tax on all of the money they receive, including the current value of the stock.

If, on the other hand, Mike withdraws the stock from the plan rather than rolling it into his IRA, his tax situation would be different, as would that of his heirs. He would have to pay ordinary income tax on the original cost of $200,000. However, the remaining $800,000 would not be subject to his ordinary income tax because of the NUA tax break.

If Mike immediately sold the stock, he would have to pay only the capital gains tax on that $800,000 NUA. Let's say that Mike instead holds the stock for a few months before selling it. When he sells, he pays capital gains tax, rather than income tax, on the NUA before he transferred the stock to his brokerage account, and on any additional appreciation since then. And because the stock is not a part of an IRA, he does not have to worry about RMDs from the account, based on the stock's value.

Also, if Mike does not roll the stock into an IRA, his beneficiaries, too, would get a break. If they sell immediately, they'd benefit from a step-up in basis to the value of the stock when Mike died. Consequently, they'd pay capital gains tax only on any appreciation in value between Mike's death and their sale of the stock, and not on the $800,000 the stock appreciated in value over the time that Mike owned it.

Let's summarize the difference between Mike not rolling his 401(k) assets into an IRA (taking advantage of the NUA tax break), and Mike rolling into an IRA. We'll assume that he is in the 35% tax bracket .

Here is the comparison if Mike immediately sells the stock:

Say Mike doesn't sell immediately and keeps the stock in the brokerage account. The value increases to $1.5 million in five years, and then he decides to sell.

Finally, assume that Mike died five years after the stock increases to $1.5 million. What would his beneficiaries have to pay?

When NUA May Not Save You: An Example

Let's go through an example where using the NUA advantage may not make much sense.

Bob is 59, about to retire, and has company stock in his 401(k) plan that's currently worth $15,000, but has a cost basis of $10,000. He's currently in the 25% ordinary income tax bracket, which means that he pays a 15% tax on long-term capital gains—and would pay that on a sale of company stock that had been moved from a 401(k) to a brokerage account.

Let's further assume that Bob waits a year to sell the stock, during which it appreciates in value by a further $2,000. He has also retired, dropping his income and income tax rate to 22%, from 25%. Further, in the case of rolling the stock over to an IRA, he invests the $2,500 he saved in income tax—albeit conservatively—in a 1-year CD, which as of August 2019 was earning about 2.5%.

Here's how the numbers fall out between rolling the stock over to an IRA and moving it to a brokerage account:

These calculations show that moving the company stock to an IRA might cost only $125 or so more in tax than moving it to a brokerage account, and then benefiting from the NUA advantages. And that cost difference is liberal, in that it doesn't account for the possible costs of borrowing money to meet the immediate tax bill from the brokerage option, nor the possibly higher investment earnings if those tax savings were invested in a less conservative vehicle, such as a mutual fund. That could close the cost gap to little or nothing.

The bottom line is that such a slim advantage for moving the stock to a brokerage account may not be worth the trouble.

Here are some fine points on fully using NUA to your advantage.

Consider Splitting Up Stock

Suppose that some shares had a very low value when they were first contributed to your 401(k), while others did not. You could use the NUA on the cheaper shares and transfer the others to your IRA. If you acquired stock gradually over your career, some of the latest acquisitions that are yet to appreciate much or at all could be transferred to an IRA, which avoids paying any income tax now and allows the stock to further appreciate on a tax-free basis. The stock you acquired early, which has appreciated significantly, could be transferred to a brokerage account. Note, however, you can't do partial NUA or partial rollovers.

Watch the Calendar

Remember that you will have to distribute and transfer your plan's assets as a lump sum. This means all of the plan's assets, not just the employer's stock, must be removed within one calendar year .

Trustees can take several weeks to process such requests. Make sure you give yourself enough time so that the distribution and transfer occur in the same year for maximum tax benefit.

Under 55? Weigh the Early-Withdrawal Penalty

Another potential downside is that if you are not at least 55 and leaving your job, you will have to pay a 10% penalty on the taxable amount in your 401(k), which for the stock is its cost-basis value. However, that also means that if the stock has grown enough (the NUA is worth more than the original amount), it could be worthwhile to pay the penalty in order to capture the NUA benefit.

Plan Around Withholding

When you distribute from your employer's plan, the employer is required to withhold 20% from the distributions for the IRS, but you might be able to get around this. Have your employer transfer the non-stock assets directly to your IRA. Then have the stock distributed to you in kind . That way, there is nothing left in the plan for the IRS.

If you can't avoid the tax, make sure your employer withholds only 20% on the cost basis, not the entire amount.

Consider Multiple Brokerage Accounts

For record-keeping purposes, do not mix NUA stock with other company stock in the same brokerage account. Doing so could make it very difficult to get the tax break. Instead, set up a separate account to hold the NUA stock.

Get Help as Needed to Educate Your Employer

Finally, in case your employer is not familiar with the NUA tax rules and allowances, you may have to do some convincing. This might involve getting a competent financial advisor or accountant to intervene on your behalf.

How Much of My 401(k) Should Be in Company Stock?

Experts agree that you should put no more than around 10% of your retirement portfolio in company stock.

Putting too much of your retirement plan in company stock can be problematic for a number of reasons. First, it reduces your portfolio's overall diversification and concentrates your holdings in just one company. Second, your investment returns and employment prospects become linked. If your employer has poor performance, you may end up losing both your job and your 401(k) value.

Finally, your employer may place restrictions on your ability to buy or sell company stock, which limits the control you have over your finances.

How Does Company Stock Work in a 401(k)?

Generally, 401(k) plan participants cannot pick individual stocks. They must choose from a menu of mutual funds and ETFs. In this respect, company stock differs since it stands by itself as shares.

Your employer may also offer a contribution match to your 401(k) in company stock., not cash In such a case, you may be able to sell those shares and reinvest them in other fund options.

What Percent of 401(k) Portfolios Do People Have Allocated to Company Stock?

According to industry research, on average, 401(k) plan participants' portfolios consist 4.5% of company stock.

The NUA tax break strictly applies to shares in the company you work for. Other assets in the 401(k), such as mutual funds , do not receive it. And you should only consider taking advantage of the move if the stock has appreciated significantly from the time it was purchased by your plan. If it has not, you might be better off rolling it over to your IRA and letting it continue to grow tax-deferred, as you would the mutual funds and other plan holdings.

If it's a close call whether keeping the stocks inside or outside an IRA will be more beneficial, some other factors may tip you in one direction or the other. The first might be the amounts involved: If the shares make up a significant amount of your net worth, the brokerage account may be more advantageous, where smaller holdings may make you more inclined to do a rollover, since the comparative tax impact may be small. Furthermore, assets held in an IRA have greater creditor protection than non-IRA accounts.

Internal Revenue Service. " Publication 575, Pension and Annuity Income ."

Internal Revenue Service. " Retirement Topics — Required Minimum Distributions (RMDs) ."

U.S. Bureau of Labor Statistics. " Table 1. Retirement Benefits: Access, Participation, and Take-Up Rates ."

Internal Revenue Service. " Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs ."

Internal Revenue Service. " 401(k) Resource Guide - Plan Participants - General Distribution Rules ."

Financial Industry Regulatory Authority (FINRA). " Putting Too Much Stock in Your Company—A 401(k) Problem ."

Investment Company Institute. " Frequently Asked Questions About 401(k) Plan Research ."

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STOCK ASSIGNMENT AGREEMENT

            This STOCK ASSIGNMENT AGREEMENT is entered into as of September 30, 2002 by and between POINT WEST CAPITAL CORPORATION , a Delaware corporation ( "Assignor" ), BROAD STREET CONTRACT SERVICES, INC. , a Delaware corporation with an office at 48 Wall Street, New York, NY 10005 ( "Assignee" ) and the holders of the Senior Notes (as defined herein).

            A.             Assignor has previously purchased 1000 shares of common stock (collectively, the "Shares" ) constituting 100% of the outstanding stock of Dignity Partners Funding Corp. I, a Delaware corporation ( "DPFC" ). Assignor is also the servicer under an Amended and Restated Contribution, Sale and Servicing Agreement (as amended through the date hereof, the "Servicing Agreement" ) dated as of March 31, 2000 among Assignor, DPFC and Bankers Trust Company as indenture trustee for the DPFC Senior Viatical Settlement Notes, Series 1995-A (the "Senior Notes" ). The holders of the Senior Notes are GE Capital Corporation as successor in interest to Heller Financial, Inc., The Lincoln National Life Insurance Company and First Penn-Pacific Life Insurance Company (the "Noteholders" ).

            B.             Pursuant to Section 3.01 of the Master Agreement dated as of March 31, 2000 among Assignor, DPFC, and the Noteholders, Assignor agreed to assign the Shares to the Noteholders or their designee upon the termination of its position as servicer under the Servicing Agreement. Assignee’s term as servicer will end on September 30, 2002, and servicing will thereafter be performed by Mills, Potoczak & Company, 27600 Chagrin Boulevard, Suite 200, Cleveland, Ohio, 44122 ( "MPC" ). The Noteholders desire that Assignor convey the Shares to Assignee and that DPFC move its headquarters to MPC’s address.

            C.             Assignee desires to purchase and hold the Shares.

            NOW, THEREFORE, in consideration of the premises and the promises, covenants and undertakings contained herein, and for valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:

            1.             Assignment . Effective as of the close of business on September 30, 2002 (as hereinafter defined), Assignor hereby sells, assigns and transfers to Assignee all of its right, title and interest to the Shares in exchange for payment on such date by the Noteholders of $1,000. Assignor shall promptly deliver the Shares and shall cause DPFC to promptly deliver the DPFC corporate

record book (including the stock register) to Reid Mandel at Katten Muchin Zavis Rosenman, 525 West Monroe, Suite 1600, Chicago, Illinois 60661, for reregistration of the Shares.

            2.              Acceptance and Assumption by Assignee . Assignee hereby accepts such assignment and agrees to pay to Assignor $1,000 in consideration for the Shares.

            3.              Indemnification . The Assignor agrees to indemnify, defend and hold the Assignee harmless with respect to any claim(s) arising from or relating to a breach of a representation or warranty made by Assignor in this Agreement. The Assignee agrees to indemnify, defend and hold the Assignor harmless with respect to any claim(s) arising from or relating to a breach of a representation or warranty made by Assignee in this Agreement.

            4.              Representations and Warranties Assignor . Assignor hereby represents and warrants to Assignee:

       (a) Assignor is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware.        (b) Assignor has the power and authority to enter into this Agreement and the person executing this Agreement on behalf of Assignor has the power and authority to do so.         (c) Assignor is the sole legal and beneficial owner of the Shares and the Shares are free and clear of all liens, encumbrances and other interests. The sale, assignment and transfer of the Shares to Assignee pursuant to this Agreement validly assigns ownership interest of the Shares to Assignee free and clear of any pledge, lien, encumbrance or security interest.         (d) Other than the Shares, Assignor does not own or hold any stock, debt instruments or other securities issued by DPFC, and DPFC has no other classes of equity or debt instruments outstanding as of the date hereof other than the Shares and the Senior Notes.         (e) Assignor has filed a consolidated federal income tax return that includes DPFC for the period through December 31, 2000. Assignor will file, on or before December 31, 2002 a consolidated federal income tax return that includes DPFC for the period through December 31, 2001 and will file, on or before June 15, 2003, a consolidated federal income tax return that includes DPFC for the period through September 30, 2002. All federal and state income and franchise taxes have been paid in a due and timely manner with respect to DPFC and the consolidated group for all open fiscal years. Assignor has paid or provided for all federal and state income and franchise taxes due for DPFC and the consolidated group tax year ending with the termination of DPFC’s inclusion in the consolidated group. DPFC has no obligations, and will have no obligations, to any affiliates under any tax sharing 2 agreement or similar arrangement.             (f) DPFC has no, and will have no, liabilities to the PBGC, or for any payroll or unemployment taxes or premiums relating to any periods prior to October 1, 2002.

5.              Covenants of Assignor .

Assignor hereby covenants to perform the following obligations:

            (a) Assignor will promptly deliver all DPFC’s corporate records, including copies of all federal and state tax returns filed on behalf of or including DPFC, to DPFC’s new headquarters, c/o MPC. Assignor will continue to maintain a mailing address and/or forwarding address through March 31, 2003, and will promptly forward all correspondence it receives on behalf of DPFC to DPFC at its new headquarters.             (b) Assignor will continue to maintain its corporate franchise and existence, until at least the earlier of (i) the transition of servicing for DPFC from Assignor to MPC is complete or (ii) December 31, 2002. In the event of its subsequent dissolution or liquidation, Assignor shall designate at least one with continuing signing authority to act on behalf of Assignor during and after its dissolution to assist Assignee and DPFC with the transition in servicing, the assumption of control over DPFC’s wind-down and DPFC’s compliance with state and federal tax and corporate filings at least until December 31, 2003, and shall require such individual to reasonably cooperate with DPFC to participate in phone calls and/or sign documents on behalf of Assignor, if otherwise essential to DPFC collection efforts, at no cost to such individual on a fully indemnified basis. Assignor shall promptly notify DPFC of its decision to dissolve or liquidate and of the names and contact information of the individual that has been provided such authority.  

            6.              Representations and Warranties of Assignee . Assignee hereby represents and warrants to Assignor:

        (a) Assignee is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware.         (b) Assignee has the power and authority to enter into this Agreement and the person executing this Agreement on behalf of Assignee has the power and authority to do so.         (c) Assignee is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act; 3           (d) Assignee: (i) has such knowledge and experience in financial and business matters that Assignee or its representatives are capable of evaluating the merits and risks of owning the Shares; (ii) is able to bear the complete loss of its investment in the Shares; and (iii) has had the opportunity to review all of the documents and agreements relating to the Shares and has had the opportunity to ask questions of, and receive answers from, the Noteholders concerning the terms and conditions of the Shares and the Senior Notes, and all such questions have been answered to Assignee's full satisfaction;         (e) Assignee confirms that it is acquiring the Shares solely for its own account, for investment purposes, and not with a view to the distribution or resale of the Shares;         (f) Assignee confirms that the right to purchase the Shares was not offered by any means of general solicitation or general advertising, that Assignee has received no representations, warranties or written communications with respect to its purchase of the Shares, and in entering into this Agreement, Assignee is not relying upon any information other than that obtained from the results of Assignee's own independent investigation;         (g) Assignee understands that there are substantial restrictions on the transferability of the Shares and it may not be possible for Assignee to liquidate an investment in the Shares, and accordingly, such Assignee may have to hold the Shares, and bear the economic risk of such investment, indefinitely;         (h) Assignee understands that the investment in the Shares involves substantial risks inherent in such an investment, including, without limitation, the fact that the Shares shall be subordinate to the Senior Notes;         (i) Assignee will arrange for DPFC to file tax returns covering DPFC for all tax periods commencing on or after October 1, 2002; and         (j) Assignee understands and agrees that (i) Assignor, as servicer under the Servicing Agreement, collected and maintained files containing sensitive medical data and other confidential information ("Confidential Materials"); (ii) various state and federal laws govern or may govern the confidentiality and restrict the use, dissemination and disclosure of the Confidential Materials (e.g. California Insurance Information and Privacy Act ( see generally Cal. Ins. Code  791 et . seq .); California Right to Financial Privacy Act ( see generally Cal. Gov. Code  7460 et . seq .); and Gramm Leach Bliley Act ( see generally 15 USC  6801 et . seq .)); (iii) there is pending legislation in California that, if passed, may govern the disclosure and confidentiality standards by which Assignee is bound (e.g. California Assembly Bill 1775 and California Senate Bill 1386); and (iv) Assignee is bound by applicable law governing confidentiality and disclosure of the Confidential Materials and will be held to the same standards as Assignor, will direct DPFC to hold and treat the Confidential Materials 4 confidentially and will not, unless required by law, or in accordance with applicable law, disclose the Confidential Materials to any person or entity.

            7.          Miscellaneous .

            (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.             (b) This Agreement may be executed in counterparts, each of which when executed by the parties hereto shall be deemed an original and all of which together shall be deemed an original and all of which together shall be deemed the same Agreement.             (c) This Agreement is binding upon each party’s successors and assigns.             (d) The representations, warranties and covenants of Assignor and Assignee herein shall survive the sale of the Shares to Assignee.

            IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written.

ASSIGNEE: BROAD STREET CONTRACT SERVICES, INC., a Delaware corporation /s/    Orlando Figueroa          Orlando Figueroa           Vice President

  ASSIGNOR: POINT WEST CAPITAL CORPORATION, a Delaware corporation /s/    John Ward Rotter         John Ward Rotter         CEO

The undersigned execute this Agreement for the sole purpose of consenting to the assignment and terms set forth herein.

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