In order to take advantage of NUA, Chevron employees must meet all of the following:
- You must distribute your entire balance in the ESIP by Dec. 31st in the same year as your distribution (though you don't have to take all distributions at the same time).
- You must take the distribution of Chevron stock as actual shares. You may not convert them to cash before distribution.
- You must have experienced one of the following triggering events:
- Separation from service from Chevron.
- Reached age 59½
Here are a few options for what you can do with your Chevron stock once you retire:
- Roll Over Your Chevron Stock To An IRA
- When you leave Chevron, you have the option to roll over your Chevron stock from your ESIP account directly to an IRA (called an in-kind distribution). With this option, you’re generally not taxed at the time of rollover. However, the special NUA tax advantages will not apply because distributions from IRAs are taxed at ordinary income tax rates. This option may still make sense if the NUA is a small percentage of the stock’s market value, or if your investment time horizon is long enough, since tax-deferred growth may be achieved for many years in an IRA.
- Transfer Your Chevron Stock To A Taxable, Non-Retirement Brokerage Account
- When you leave Chevron, you may also have the option of transferring your Chevron stock in kind to a taxable, non-retirement brokerage account (to discuss distribution options for your other ESIP investment options please call The Retirement Group.) The cost basis of the stock is taxed at ordinary income rates in the year the stock is distributed from the plan. When you finally sell your shares of Chevron stock, you are subject to long-term capital gains on the net unrealized appreciation at distribution. Any additional appreciation should be taxable as short-term or long-term capital gains, depending on how long you held the stock after it was distributed in kind from the plan.
Chevron employees that have previously taken a distribution from their savings plan and wish to receive NUA stock distribution must wait until the next triggering event. For example, if you received a partial withdrawal from the savings plan at age 57, you cannot request an NUA distribution until the next triggering event at age 59½. It is important to consider that making withdrawals prior to taking an NUA distribution may exhaust the after-tax balance and jeopardize the ability to receive an NUA distribution of “tax-paid” shares at a later date.
Here are a few options for Chevron employees who want to receive retirement income prior to age 59½:
- A Chevron employee retires at age 56 and rolls over their pension lump sum to an IRA. The employee could also rollover their ESIP balance to an IRA. If they needed to make penalty free IRA withdrawals, they could do so via IRS code 72(t). However, there are two drawbacks to this code. First, the employee can only withdraw up to a certain amount based on their life expectancy.Second, the employee must withdraw the same amount for at least five consecutive years or until they turn 59½, whichever comes last.
- The employee could also leave their assets in the savings plan and receive annual penalty free withdrawals via the age 55 rule. The rule states that employees who have separated from their company during or after the year they turn 55 can receive penalty free withdrawals from the savings plan, variable in amount, from year to year, once every 30 calendar days. After-tax assets are not taxable, and pre-tax assets are subject to ordinary income taxes. The employee would still have the ability to:
- Receive IRA distributions from the pension lump sum rollover under the 72(t) tax guidelines or wait until reaching age 59½; and
- Be able to receive an NUA stock distribution once they reach 59½ or older (reaching the next triggering event after taking non-NUA withdrawal).
- A retiree over age 59½ receives a distribution from the savings plan, they must withdraw their full balance during that calendar year in order to utilize NUA. If they do not, then they have to wait until the next triggering event to receive an NUA distribution.
*Remember: Do not use NUA just because of the tax treatment. NUA maintains the risk of Chevron stock exposure until sold after distribution. In some cases, it may be more beneficial to diversify in a tax-deferred account.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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