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Net Unrealized Appreciation

In our last blog, “401(k) Rollovers”, we discussed the advantages of rolling over your 401(k) to an IRA. Many can benefit from rolling over their assets, however if you have a 401(k) that has highly appreciated company stock, you may be able to utilize a technique called Net Unrealized Appreciation (NUA). NUA represents the difference in value between your cost basis of company shares and their current market value.

The tax benefit of NUA occurs when rolling over company stock into a non-qualified account as opposed to a tax deferred IRA. When distributing the stock, you will pay taxes on the cost basis at ordinary income (as long as you are over age 59.5, otherwise, you will incur an additional 10% penalty), however you will not owe taxes on any NUA. Once in the non-qualified brokerage account, any NUA will only be taxed as a long term capital gain as opposed to ordinary income which may result in a large tax savings. Any additional appreciation, following the stock being placed in the non-qualified account, will be taxed as either a long term or short term capital gain, depending on when the gain is realized. Depending on your tax bracket and how much your company stock has appreciated will dictate whether or not utilizing NUA would significantly lower your tax liability.

Keep in mind that the tax benefits of NUA is only for company stock. All other stocks, bonds, etc. in your 401(k) will be taxed at ordinary income if you rollover your assets into non-qualified brokerage account. It is important to consult with your tax advisor prior to making the decision of transferring qualified assets into a non-qualified account, as it may result in a significant tax liability if not done properly.

Please contact Mitlin Financial if your retirement account has company stock. We can work with you to determine if the technique of NUA would make sense for you.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

401(k) Rollovers

When leaving a job, one might ask, what should I do with my 401(k)? Should I leave it with my previous employer, move the assets to my current employer’s plan or rollover the assets into an IRA? Generally speaking, it is more beneficial to rollover your 401(k) to an IRA.

One reason why an investor would want to rollover their assets from a 401(k) into an IRA are the limited investment options provided by their 401(k) plan. Rolling the assets into an IRA (which if done properly, is a tax free exchange) gives you much more flexibility when it comes to investment options and opens the door to new bonds, stocks, funds, or investments that may outperform current options. Many 401(k) owners do not manage their own accounts properly and may want to hand pick a wealth manager for their IRA who can provide investment advice and guidance, which would be nearly impossible if you kept your 401(k) with your previous employer.

Another advantage of rolling over your assets into an IRA is simplicity. Having multiple 401(k)’s may make it difficult to track all of your assets and determine which are performing properly. Maintaining the assets in one account or with one custodian can simplify one’s finances and make retirement planning much easier.

If you are overwhelmed because you are tracking multiple 401(k) accounts, contact Mitlin Financial in order to see if rolling over assets into an IRA can simplify your retirement planning and open your account up to new investment options that will benefit you in the long run.

Stay tuned for the upcoming blog “Net Unrealized Appreciation” which will explain the advantages and disadvantages of owning company stock in your 401(k).

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Roth IRA Conversions

Roth IRA conversions refer to the transfer of assets from a Traditional IRA to a Roth IRA account. One of the main differences between a Roth and Traditional IRA is that qualified withdrawals from a Roth IRA will be tax free, while qualified withdrawals from a Traditional IRA are treated as ordinary income. Depending on your current financial situation, it may benefit to transfer assets from a Traditional IRA to a Roth IRA.

Traditional IRA’s benefit those who wish to save for retirement and lower their current tax liability. On the other hand, Roth IRA’s will benefit those who do not need a tax deduction today, but would like their assets to grow and not be taxed upon their withdrawal.

Transferring from a Traditional IRA to a Roth IRA will cause a tax liability, in the year of conversion, in which all assets transferred will be taxed as ordinary income. The benefit of this transfer lies in the future. An investor who does not plan to retire anytime soon and expects their tax liability to increase in retirement (whether due to significant savings or an increase in tax rates), may benefit by taking the tax hit now, accumulate their assets tax deferred and take their withdrawals on a tax free basis. The longer the time horizon until retirement, the more likely the investor could potentially recoup the taxes due on the transfer.

If you plan to retire sooner than later and believe that you will be in a lower tax bracket at retirement, a Roth IRA conversion can be very damaging to your financial well being. Not only could you experience a major tax liability, you would also lose the benefit of contributing on a pre-tax basis.

If you feel that you may benefit from converting assets from a Traditional IRA to a Roth IRA, contact Mitlin Financial Inc. for a free consultation.

  Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

First Quarter Market Review

The first quarter of 2013 provided very healthy returns in the stock market, similar to the first quarter of 2012. Many of the major equity indices saw gains upwards of 10% .

The Dow Jones Industrial Average went up 11.93%, while the S&P 500 also had a robust quarter with a return of 10.61%. The year started off strong with a 2% uptick on the first trading day after Republicans and Democrats reached a deal on the Fiscal Cliff. Stronger than expected economic data, such as the addition of 236,000 private sector jobs in February, and the Federal Reserve’s commitment to purchase $85 billion worth of bonds on a monthly basis fueled the market through March.

Unlike the equity indices, many fixed income holders may have seen a dip in their assets since the beginning of the year. The bond indices were hard pressed to show positive gains as is seen by the Barclays U.S. Aggregate Bond Index. The index dipped -.12% since the beginning of January. Treasury yields rose slightly in the first quarter increasing from 1.78% to 1.87% primarily due to an improving economy. Higher yields ultimately drove down the value of bonds at a modest rate.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Rule 72(t)

When speaking with most people about early withdrawals from an IRA before age 59.5, you will hear that your withdrawal will be subject to the 10% early withdrawal penalty and that it will also be counted as taxable income. This is true, however, the rule known as 72(t) can help the owner of a retirement account avoid the 10% withdrawal penalty.

Rule 72(t) states that investors can avoid the 10% penalty if they take “substantially equal periodic payments” over a period of five years or until the individual reaches age 59.5, whichever comes later. Once elected, this method is irrevocable and payments can be adjusted only once over the life of the distribution. Keep in mind that distributions must occur at least once per year. If you have exhausted all other avenues, utilizing rule 72(t) may help you.

Utilizing rule 72(t), with the assistance of a financial professional, will help you avoid the 10% penalty, however you will still have to pay income taxes on the distributions. Please note, that using rule 72(t) should be a last resort and that tapping into an IRA before retirement can severely impact your long term financial plan.

If you feel that rule 72(t) may be an option for you, please contact Mitlin Financial for a free consultation.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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