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Using Net Unrealized Appreciation for Procter & Gamble PST rollovers.
Rob Lemmons CFP®, CPA, AIF®, CEPA
Thursday, February 4, 2021
Trustee's Cost: A One Time Shot to Use It or Lose It
Know your options at retirement!
If you plan to retire in the future or have retired from P&G and haven't taken a total distribution from your PST, you still have time to take advantage of a little-known rule in the Internal Revenue Code (IRC) section 402(e)4. This allows a participant to defer taxes on P&G shares received as a lump-sum distribution and qualify for long-term capital gains tax treatment when the stock is sold in the future.
What is Trustee's Cost?
Throughout your years of employment, P&G has contributed two types of company stock to your PST: preferred shares and common shares. The average cost per share that P&G paid for the stock when contributing to your PST is referred to as Trustee's Cost. The average cost varies on both, but the preferred shares have a significantly lower average cost basis, as low as the mid $6 range, compared to the $30 range for common shares. One key factor is considering whether to utilize the IRC rule is the Net Unrealized Appreciation (NUA) of your P&G stock. NUA is the difference between the current market value of P&G stock and the average Trustee's Cost. Simply put: the more the stock has appreciated, the lower the current tax and higher the potential tax savings.
How does it work?
When you are eligible to take a distribution from your retirement account, you must complete a lump sum distribution of the entire vested balance within the same tax year. This includes the balance in both the PST and the Savings Plan.
The distribution of company shares must be taken directly from the PST in order to qualify for the Trustee's Cost tax treatment. The NUA strategy can be used on the entire number of preferred and/or common shares, or on just a portion. Any remaining employer stock not elected for NUA treatment can be rolled into a tax-deferred Individual Retirement Account (IRA) along with the remaining balance in the PST and Savings Plan.
In the year of distribution only, the Trustee's Cost portion will be subject to ordinary income taxes. For example, if you withdraw 1,000 shares of stock with a market value of $65 per share, the total value of the stock will
be $65,000. If the cost basis – the
original price of those shares of stock – is $6 per share, you will pay
ordinary income tax on the trustee’s purchase price of only $6,000 (1,000
shares time $6 per share). If you
subsequently sell the shares, the remaining $59,000 (1,000 shares times the
difference between market value and trustee’s cost basis) will be taxed at
long-term capital gains rates.
Once the NUA rule is utilized, the stock is no
longer considered part of the qualified retirement plan. Further, the NUA is not subject to tax until
you sell the stock and, even then, it is only subject to long-term capital
gains tax rates. Based on current tax
rates, this could provide significant tax savings by shifting ordinary income
to long-term capital gain income at the time of sale. Currently, ordinary income tax rates are 15%
to 35%, while long-term capital gains rates are between 0% and 15%.
Assume a married couple filing a joint return takes the standard deduction and requires $130,000 of annual gross income. In one scenario the couple takes an IRA distribution of $130,000 subject to ordinary income tax rates. In Scenario two, the couple took advantage of
the Trustee’s Cost election, took and IRA distribution of $65,000 subject to
ordinary income tax rates and sold P&G stock subject to long-term capital
gains rates. By utilizing the Trustee’s
Cost strategy, the couple in Scenario two is able to achieve $8,784 in federal
|Capital Gain Income
Net Federal Tax Savings each year: $8,784
Failure to Follow the Rules
The IRS strictly enforces the NUA rules under the Internal Revenue Code Section 402(e)4. To qualify, you must observe the following rules:
Failure to follow these rules will disqualify
the NUA election and the entire market value of the company stock not rolled
into an IRA will be taxed at ordinary tax rates. A 10% distribution penalty may apply to the
Trustee’s Cost if the participant is under 59 ½ and does not qualify for an
exception. One such exception is
available when an individual over age 55 separates from service and has been
employed with Procter and Gamble for at least five years.
- A lump sum distribution of the entire vested balance in the plan must be completed within the same tax year.
- The distribution of company shares on which NUA is elected must be taken directly from the retirement plan.
- One of four special events must have occurred:
- Separation from service
- Total disability
- Attaining age 59 ½
As part of an overall comprehensive financial
plan, taking advantage of the NUA strategy as part of your distribution from
your P&G PST can add significant tax savings in retirement. Due to the highly complex nature of
retirement plan distributions, we recommend consulting financial, legal, and
tax experts before making any final decisions.
To find out more about Total Wealth Planning, visit us at www.twpteam.com or contact Rob Lemmons at 513-984-6696.
For over 20 years Rob has been providing financial planning, investment advice and tax planning strategies to high net worth individuals located worldwide. He has advised senior executives at Procter & Gamble, Chevron, General Electric, Johnson and Johnson, Fifth Third Bank and other Fortune 500 companies. Rob specializes in personalized retirement planning, corporate retirement plans, and complex incentive compensation programs for executives such as non-qualified employee stock options, incentive stock options, and both restricted and performance based shares.
CIRCULAR 230 DISCLOSURE
In compliance with requirement imposed by the
IRS pursuant to IRS Circular 230, we inform you that any U.S. tax advice
contained in this communication is not intended or written to be used, and
cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing or recommending to another party any transaction or matter
Please be advised that the information in this
document has been compiled to the best of our knowledge and with the best
intention to help those who seek and use the information contained in this
document. This document contains timely information about complicated tax
topics that may eventually be changed, outdated, or rendered incorrect by new
regulation or official rulings. Readers are cautioned, however, that this
document is not intended to provide tax, legal, accounting, financial, or
professional advice. If such services are required, then readers are advised to
seek the aid of competent professional advisors.