Case Study of Company Stock Sale

This is a case study of how a Charitable Installment Bargain Sale can be used to minimize taxes on the sale of company stock held in a company 401K plan.

A 60 year old gentleman had a large amount of company stock in an old 401K plan with his former company. He had left several years ago, but kept the stock in his old plan.

Now he is ready to retire, but if he rolls the stock into a traditional IRA and sells it, he will pay ordinary income tax on the entire amount.

His cost basis in the stock is 70K. The stock value is now worth over 1 million dollars. He has other income, but not quite enough to maintain his lifestyle. Any distribution would be taxed at about 37% between state and federal taxes. That's almost 40 cents on the dollar that would go to Uncle Sam.

So, here is a solution that makes a lot of sense.

He has a one time shot, since the stock is in a 401K plan, to pay ordinary income tax on his cost basis and get the stock out of the plan. This means that for about 26K (income tax on 70K) he now has control of his stock.

When he sells the stock, he will pay capital gains tax on the sale instead of ordinary income tax. So now, his tax rate drops to 24% vs 37%. That is great in and of itself, but there is more.

This gentleman is at a point in life that he needs to protect his principle and not leave it open to the fluctuations of the stock market. He doesn't need it all at once, but needs a steady, reliable stream of income for his retirement.

Through a Charitable Installment Bargain Sale, he is able to get an immediate tax deduction to lower his income for the next 6 years (and also offset most of the tax immediately due on the cost basis of his stock), and he is able to get a partial forgiveness of the capital gain forever as well as a guaranteed income stream for either 20, 25 or 30 years. He pays the remainder of the capital gains tax in small amounts as he receives the payments, and the bulk of the money continues to earn interest for him.

As always, there are specific IRS rules to be followed and each case is unique. A complete review of your total financial picture should always be done to determine the best plan for you.

Paula Straub
savegainstax@gmail.com
760-917-0858

Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.