The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Oregon is representative of questions we received concerning the changes to capital gains tax rates. The advisor asked:
“Several of my clients who have employer stock in their workplace retirement plans are contemplating using a net unrealized appreciation (NUA) tax strategy. I’ve also heard something about a special tax rule for gains on stock held for more than five years. What is this special tax rule and is it still applicable?”
Highlights of Discussion
• The advisor is referring to what was known as the “qualified five-year gains” on stock. Although at the end of 2012 it was a former tax policy poised for reinstatement, the American Taxpayer Relief Act (ATRA) permanently repealed this special tax rule.
• Prior to 2003 and the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA 2003), special rules applied to the gains on the sale of capital assets held for more than five years where the holding period began after Dec. 31, 2000. These qualified five-year gains were taxed at a maximum rate of 18% (8% for individuals in the 10% and 15% marginal income tax brackets). Among other changes, JGTRRA 2003 eliminated these lower tax rates for qualified five-year gains.
• Currently, had the fiscal cliff negotiations by Congress not resulted in enactment of ATRA or some other agreement, the country’s tax policies would have reverted to pre-2001 policies, which would have meant the special tax rules for qualified five-year gains would have been reinstated. Consequently, employer stock held as a retirement plan investment could have been affected.
• ATRA made changes to the long-term capital gains tax rules for 2013 and beyond.
• Employees who participate in workplace retirement plans that offer employer stock as an investment option should be cognizant of the capital gains tax rules and the option to invoke the special tax rules associated with NUA.
Conclusion
When specific tax issues arise, financial advisors should always encourage their clients to speak with their tax attorneys or other tax professionals regarding their unique financial situations. However, financial advisors who have a general understanding of the tax rules associated with retirement plans, such as those applicable to employer stock and NUA, are better positioned to assist their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
