©2015, College for Financial Planning, all rights reserved. Session 7 NUA Fundamentals and Keogh Contributions CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

Session Details Module(s)3 Chapter(s)5, 9 LOs3-5 Describe the basic characteristics of stock bonus plans. *This session will cover the essentials of Net Unrealized Appreciation. 3-9 Describe the basic characteristics of a Keogh plan, and calculate the owner’s contribution amount. 7-2

Net Unrealized Appreciation (NUA) NUA treatment is available for any employer stock distributed from a qualified plan Stock bonus, ESOPs, 401(k) profit sharing, are all qualified plans, so the NUA rules would apply An advantage of NUA is that it is taxed as a long-term capital gain, not as ordinary income 7-3

NUA Example Josephine, age 53, takes a distribution on March 1, 2015, of 3,000 shares of company stock. Her cost basis is $65,000 (the amount of employer contributions) and the stock is worth $255,000 when distributed. She sells all 3,000 shares on July 15, 2015, for $270,000. Ramifications are: o $65,000 taxed as ordinary income, and subject to 10% penalty tax o $190,000 NUA taxed as a long-term capital gain o $15,000 additional gain taxed as a short-term capital gain (if held for more than one year from distribution date, then any additional gain would be long-term) 7-4

NUA Example 401(k) account balance$300,000 Company stock ($10,000 basis) taken as a taxable distribution in kind 1 $100,000 Other assets rolled over to Traditional IRA$200,000 Taxed as ordinary income when received$10,000 Taxed as long-term capital gains when stock is sold$90,000 Taxed as ordinary income when withdrawn from IRA 2 $200,000 1 Does not consider the possibility of early distribution penalties. 2 Assumes no increase in value. 7-5

NUA Tax Implications Value Income Tax Bracket 1 25%35% Tax on company cost basis$10,000$2,500$3,500 Tax on NUA Gain 2 (15%)$90,000$13,500 Tax on IRA Rollover when withdrawn 3 $200,000$50,000$70,000 Total Income Tax$66,000$87,000 Tax when withdrawn if entire amount rolled over to an IRA $300,000$75,000$105,000 NUA income tax savings$9,000$18,000 1 State and local income taxes are not considered 2 Assumes securities are sold at the distribution price 3 Assumes no increase in value 7-6

Keogh Plans—Basic Provisions Available only to unincorporated businesses— sole proprietor or partnership Takes the form of a qualified plan (defined contribution or defined benefit) Certain provisions for owner/employee are unique to Keoghs: o Owner/employee’s contribution is calculated on net earnings o Lump-sum distribution treatment is not available to owner/employee for separation from service before age 59½—available only for death, disability, or attainment of age 59½ 7-7

Calculation of Maximum Deduction for Keogh Plan Contribution Step 1: Calculate self-employment tax Schedule C net profit (business profit)$100,000 Less 7.65% of self-employment income($7,650) Self-employment income subject to self-employment taxes$92,350 Times 15.3% equals self-employment tax$14,

Calculation of Maximum Deduction for Keogh Plan Contribution Step 2: Determine adjusted contribution percentage for owner Percentage contribution for employee participants (employee percentage).25 Divide by 1 plus employee percentage1.25 Equals adjusted contribution percentage for owner

Calculation of Maximum Deduction for Keogh Plan Contribution Step 3: Multiply net earnings by adjusted contribution percentage Schedule C net profit$100,000 Less income tax deduction (1/2 self-employment tax)$7, Net earnings$92, Times contribution percentage for owner.20 Owner’s contribution for his own benefit$18,

Practice Problem Jane Momeyer is a financial planner who grossed $200,000 this year. Her expenses including the plan contribution for her staff were $130,000. Her profit sharing contribution for her staff was 10% of compensation. How much can she contribute to the profit sharing plan for her own account? 7-11

©2015, College for Financial Planning, all rights reserved. Session 7 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits