What is Net unrealized appreciation?
In short
When employer stock is taken out of a qualified retirement plan in a lump-sum distribution, only the plan's cost basis in the shares is taxed as ordinary income. The net unrealized appreciation is taxed as long-term capital gain when the shares are sold.
Key takeaways
- The lump-sum distribution must follow separation from service, reaching age 59½, disability or death.
- Growth after the distribution is short- or long-term depending on how long the shares are then held.
- Net unrealized appreciation gets no step-up in basis at death.
Example
Shares with a plan basis of $50,000 and a value of $300,000: $50,000 is ordinary income now; the $250,000 is long-term gain on sale.
Where it's tested
TCP: Retirement Planning Strategies — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A taxpayer has $90,000 in traditional IRAs, of which $9,000 represents nondeductible (after-tax) contributions. The taxpayer converts $10,000 to a Roth IRA. How much of the conversion is taxable?