How to Approach Your Stock Holdings With a Low Basis

“Hey Mike, what’s the best way to deal with a company stock that has a low basis?” Discover what “Net Unrealized Appreciation” is and how it may be a good tax strategy for you when you get ready to retire. 

Text your questions to 913-363-1234.

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What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.

This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.

Mike: 00:05

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, Which means when it comes to financial topics, we can pretty much talk about it all. Now that said, please remember this is just a show.

Mike: 00:36

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thanks for being here.

David: 00:54

Yes. Glad to be here. It's

Mike: 00:55

fun. David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now either by texting them to 913-363-1234. Again, that number, save it in your phone. [phone], or email them to hey [e-mail].

Mike: 01:14

Let's begin.

David: 01:17

Hey, Mike. What's the best way to deal with a company stock that has a low basis?

Mike: 01:23

That question's interesting one. I need more information to answer it.

David: 01:27

Okay.

Mike: 01:27

But I I see where they're going. This is very common, especially like the Microsoft employees, the the Amazon employees, these major companies. I immediately think of Microsoft, Amazon, Apple, Facebook, Meta, Tech Stocks. They issue these companies, holdings. And the information I need in addition to this is, are those stocks held in a qualified account or a non qualified account?

David: 01:53

Okay.

Mike: 01:54

That's jargon. So let me explain it. Yeah. A qualified account is an account. It's a retirement account.

Mike: 01:59

Think of your 4 one k. Think of your IRA. Yeah. So it's qualified for the retirement benefit as in you don't pay capital gains on the way up.

David: 02:08

Yeah. It can grow, and then you don't report that growth on your taxes.

Mike: 02:12

Nope. Your CPA has no idea. Yeah. Which is nice. Yeah.

Mike: 02:15

Very nice. Nice. Yeah. But the the qualified accounts are gonna be different in how we handle this than nonqualified accounts. So nonqualified account, think of your brokerage account.

Mike: 02:26

You're subject to the capital gains. K? So if you were to sell it, you pay the 15%, 20% capital gains, or 0% depending on your situation. Or if it's short term, you capital gains, you held it less for the new year, you would pay, whatever your income tax rate would be. K?

Mike: 02:42

So let's answer the question in 2 parts. The easy one is if you have it in a nonqualified account. So it's not a retirement account. That's probably the easiest way to explain it for people.

David: 02:52

Okay. Yeah.

Mike: 02:53

So the answer is through tax loss harvesting. So just think of it this way. Let's say you've got, I don't know, 50 secondurities. You've diversified and you hope most of them go up. And let's say most of them do go up, but there's a couple that lose money.

Mike: 03:08

Great. Sell the ones that lost money. You overall, you still made money. And then use the losses that you had in your portfolio and then offset it with the gains that you slowly sell your security. And again, a non qualified brokerage account because you can offset the losses with gains.

Mike: 03:25

So you can slowly get out of that position and better diversify your assets more tax efficiently than you would have otherwise. K? It's okay to sell losses. Not all your stocks are winners. That's never gonna happen.

Mike: 03:38

I I shouldn't say never, but you get the idea. Yeah. It's highly improbable that every stock you pick is going to always make money. Right. I'm being facetious.

Mike: 03:48

So that's the first one. Now the other one, which is very interesting, is if you have it in a qualified account like your 401 k.

David: 03:56

Okay.

Mike: 03:57

This is gonna be very technical. Bear with me. But many people, including financial professionals, do not know about this part of the tax law.

David: 04:06

Okay.

Mike: 04:06

It's called an NUA or a net unrealized appreciated asset. So let me say all that differently. If, I don't know, let's say Apple or Facebook, whatever, has issued you stocks for the last 30 years, 20 years, 10 years, whatever it is, and you bought them all at a very low basis, and you never sold them in your 401k. Technically, you have not realized those gains.

David: 04:33

And so what's the low basis against of the

Mike: 04:35

So let let's just say stock x y z. You bought it for years at $10 a share. It's now worth a $100 a share.

David: 04:41

Okay.

Mike: 04:42

And we're gonna keep it at one share to keep this really, really simple.

David: 04:45

That's appreciated.

Mike: 04:46

So if you were to, in a normal situation, sell that, you're gonna pay, capital gains on $90. So $10 a share, $90 of gains for the $100 position. That stinks. Right?

David: 05:00

Yeah.

Mike: 05:00

Well, if you were to sell let's say let's say you put it all to cash and you sold it and you had a distribution, the $100 wouldn't be taxed in the capital gains rate, which is 0 15 or 20%. It's taxed at your tax rate. Oh. Your income tax. Because it's a distribution, so it's taxes income.

Mike: 05:18

So what people can do, and many people don't realize this, is you can take the stock itself, assuming your 401 k will allow this, and move it over to a non qualified account. Oh. K? And you would pay the tax. And there's a lot of nuance this.

Mike: 05:35

So I'm kind of hesitant about even explaining over the radio. So do not take this word for word. Seek a CPA or someone who understands the tax law like us at Kedrick. But you could take that highly appreciated asset in your 41 k. You can't sell it, but you could move the position into a nonqualified account and then pay income tax on the basis as in the amount that you bought it at that that low dollar amount for each position over the years.

Mike: 06:03

You would pay taxes basically on the basis. Move it over. Okay. And then when you realize the asset, you're now realizing that underneath a nonqualified or a brokerage account or a capital gains rate.

David: 06:15

Okay.

Mike: 06:16

This is complicated stuff.

David: 06:17

Yeah. But I think I'm following, though, actually.

Mike: 06:19

Yeah. It it good. Because we didn't we didn't even talk about this before the show.

David: 06:25

No.

Mike: 06:25

And I don't think you've worked with the client that had to do with this yet. This is this is tricky. Yeah. But, I mean, would you rather pay income at your effective tax rate? Let's say it's 20 to 25% at best.

Mike: 06:35

But let's say you've got a $1,000,000. So now you're in the the high, you know, the thirties percentile rate, or you could pay that 15 or 20%.

David: 06:43

Oh, yeah. We know the answer.

Mike: 06:45

So when people and I I see the value of this in your 401k, you don't wanna be all in one thing. So you get the stock the second you could sell it. You sell it. You diversify. I get that.

Mike: 06:56

But there are some people out there that have a highly appreciated stock as in they bought it for cheap and it grew a lot in their 401 k that their companies gave them that they never sell whether it was sentimental value or whatever it was. And they held it for a very, very, very, very long time. Mhmm. This is for you. Mhmm.

Mike: 07:14

Maybe. A lot of nuance Yeah. Has to be done right. Gotta time it correctly as well because you gotta make sure it end up in the long term capital gains. You gotta hold it for enough period of time.

Mike: 07:24

You gotta prove that. There's some accounting work that needs to be done. But a lot of money can be saved from this, which is one of the many tax strategies that you wouldn't even think about Googling or asking on chat GPT. So, yeah, this is the NUA strategy. If you wanna do some research on it, Ed Slot is one of the the coolest CPAs nationally recognized.

Mike: 07:49

Just look up NUA. So Nancy umbrella alpha for the was it the pilot phonetics or whatever it is?

David: 07:56

Yeah.

Mike: 07:56

Unrealized appreciated asset. NUA, you can look up his work. You can ask chat g p t how it works. But I do not recommend you go in about this on your own. Work with a financial professional because you want to make sure you do things right.

Mike: 08:11

Because if you take one step out of line, it could create a massive tax bomb, and you do not want that happening, especially as you're trying to enter into retirement, preserve assets, and make good and healthy financial decisions. But, yeah, this is why people come to us for advanced tax planning. It's not just IRA to Roth conversions. There are so many other things that you could do. You're listening to how to retire on time.

Mike: 08:39

That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.

Mike: 09:05

This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.