Author Topic: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?  (Read 4086 times)

Freeyourchains2

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An excerpt from: http://www.obliviousinvestor.com/should-i-rollover-my-401k-into-an-ira/

"Does Your 401(k) Include Employer Stock?
If your 401(k) includes employer stock that has significantly appreciated in value from the time you purchased it, you’d do well to speak with an accountant before rolling over your 401(k). Why? Because under the “Net Unrealized Appreciation” rules, you may be able to take a lump-sum distribution of your 401(k) account, moving the employer stock into a taxable account and rolling the rest of the account into an IRA.

Why would such a maneuver be beneficial? Because, if you roll the stock into a taxable account, only your basis in the stock (i.e., the amount you paid for it) will be taxed as a distribution. The amount by which the shares have appreciated in value (the “Net Unrealized Appreciation”) isn’t taxed until you sell the stock. And even then, it will be taxed at long-term capital gain tax rates (currently, a max of 15%) instead of being taxed as ordinary income.

In contrast, if you roll the stock into an IRA, when you withdraw the money from the IRA, the entire amount will count as ordinary income and will be taxed according to your ordinary income tax bracket at the time of withdrawal.

Example: Martha recently retired from her job with a utility company. She owns employer stock in her 401(k). The stock is currently worth $100,000. The total amount she paid for the shares was $42,000.

If she rolls her entire 401(k) into an IRA, when she withdraws that $100,000, the entire amount will be taxable as ordinary income.
If, however, she rolls the employer stock into a taxable account, she’ll only be taxed upon her basis in the shares ($42,000). And when she eventually sells the shares, the gain will be taxed as a long-term capital gain (at a maximum rate of 15%) rather than as ordinary income.
Remember, though, that holding a significant amount of your net worth in one company’s stock is risky—especially when that company is your employer. Be careful not to take on too much risk in your 401(k) solely in the hope of getting a tax benefit in the future."

So match your 401k, and then collect your employer stock in it (if any), or make your own business that allows it's stock to be accumulated inside a 401k plan while still a few micro-pennies/share until they blossom into hundreds per share with your companies increase in earnings.

Then you only have to deal with future new and unfolding Fed policy changes of "Max $300 Million 401k distrubution withdrawal limits".

What do you think of this approach?


fiveoclockshadow

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #1 on: July 18, 2013, 02:47:07 PM »
I was unfamiliar with this rule.  More about it here:

http://www.bogleheads.org/wiki/Net_Unrealized_Appreciation_-_NUA
http://www.forbes.com/sites/advisor/2012/01/30/one-thing-you-dont-know-about-401k-rollovers-nua/

My conclusion on reading your quote was that this only made a lot of sense to someone who was old and would consume the money rather soon while being in a high tax bracket.  The linked Forbes article seems to make that point as well.

Still - good to know about.  Thanks!

Reepekg

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #2 on: July 20, 2013, 12:40:06 AM »
This rule would be nice if I ever found myself in a narrow range of situations in which this would be beneficial.

There is no way I'd engineer my retirement to accommodate the possibility of using this rule.

2527

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #3 on: July 21, 2013, 05:59:28 AM »
Maybe somebody knows the answer to this.  I remember hearing Mitt had large number millions of dollars in his IRA.  I thought the IRA contribution limit was $5000 per person per year, so the most somebody could get to in an IRA at Mitt's age was a few million.

How does he have so much money in his IRA?

TLV

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #4 on: July 21, 2013, 08:05:51 AM »
401ks have a combined employee /employer contribution limit closer to 50k, which can be rolled over to an Ira. I'm sure he also bought his own company stock and profited handsomely from it.

To be honest, though, with that level of gains I would have thought a regular taxable account would have been better, because his ordinary income tax rate will be so high when he withdraws it, which he'll have to start doing at 70. The "lovely low taxes of early retirement" don't really apply when your swr is in the millions. Unless it's actually a Roth.

Undecided

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #5 on: July 21, 2013, 08:20:16 AM »
401ks have a combined employee /employer contribution limit closer to 50k, which can be rolled over to an Ira. I'm sure he also bought his own company stock and profited handsomely from it.

To be honest, though, with that level of gains I would have thought a regular taxable account would have been better, because his ordinary income tax rate will be so high when he withdraws it, which he'll have to start doing at 70. The "lovely low taxes of early retirement" don't really apply when your swr is in the millions. Unless it's actually a Roth.

He must not have seen Freedyourchains advice about declining to invest in retirement accounts.

Freeyourchains2

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #6 on: July 22, 2013, 07:30:48 AM »
401ks have a combined employee /employer contribution limit closer to 50k, which can be rolled over to an Ira. I'm sure he also bought his own company stock and profited handsomely from it.

To be honest, though, with that level of gains I would have thought a regular taxable account would have been better, because his ordinary income tax rate will be so high when he withdraws it, which he'll have to start doing at 70. The "lovely low taxes of early retirement" don't really apply when your swr is in the millions. Unless it's actually a Roth.

He must not have seen Freedyourchains advice about declining to invest in retirement accounts.

AND he must not have seen this advice for his financial/political future:  how running for Treasury Secretary, VP, or President, allows for 0% Capital Gains taxes.
http://www.celebritynetworth.com/articles/entertainment-articles/the-200-million-reason-henry-paulson-became-treasury-secretary/

Granted Obama has a wealth workaround too, since he can't own stocks as President. Obama uses the books he published back in college as a front for political party income (somewhere in the income of $3 Million a year per book). Then for some reason he invests his savings in Treasury bonds, which is a bet for US economic mutual destruction. Aka he'll make money if the US economy fails into a great depression, because then all investors will run to Treasury bonds.

But this is discussion for another thread, though relates to investments.
« Last Edit: July 22, 2013, 10:12:32 AM by Freeyourchains2 »

arebelspy

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #7 on: July 22, 2013, 10:04:24 AM »
401ks have a combined employee /employer contribution limit closer to 50k, which can be rolled over to an Ira. I'm sure he also bought his own company stock and profited handsomely from it.

To be honest, though, with that level of gains I would have thought a regular taxable account would have been better, because his ordinary income tax rate will be so high when he withdraws it, which he'll have to start doing at 70. The "lovely low taxes of early retirement" don't really apply when your swr is in the millions. Unless it's actually a Roth.

He must not have seen Freedyourchains advice about declining to invest in retirement accounts.

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neoptolemus412

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Re: How Mitt Romeny did it...Does Your 401(k) Include Employer Stock?
« Reply #8 on: July 23, 2013, 07:48:44 AM »
First time poster.  Here's a simplified explanation.  No, normal people cannot get these returns in their IRA.  This is a complex strategy that only a partner in VC, Private Equity, or a Hedge Fund could use as a retirement strategy.

Mitt worked in private equity as a partner doing leverage buyouts.  For instance, when Bain invested in a Staples, the partners could invest in a pool along with others, thus taking an equity stake.  However, Mitt's investment was subject to 20% return on any gains due to Bain's buyout of the company.  The usual standard is 2/20% business model that allows private equity investors to gain 20% returns on their interest as a LT capital gain.  This is called 'carry' or 'carried interest'.   So when Mitt invested in a deal, he maxed out IRA contribution as his portion of the investment.  So $30,000 represented a stake in a private company that might be valued at $.01/share was his investment.  When that company was turned around & went public, Mitt's IRA increased exponentially.  Only a few hundred people in the US financial services world can invest this way.  NUAs are not really in play here.  They are a vehicle one could use, but they would not grow to the levels of Mitt's investments. 

Here's an article that explains this further.

http://www.theatlantic.com/politics/archive/2012/09/whats-really-going-on-with-mitt-romneys-102-million-ira/261500/