In many large, publicly traded companies, employees are commonly rewarded with employer stock, often granted directly through a profit-sharing or employee stock ownership plan, or at least by allowing employees to purchase shares themselves inside of their 401(k) plan. Such strategies help encourage an ownership mentality among employees, who literally become small shareholders of the business. The disadvantage, however, is that when employer stock is purchased or owned inside of a retirement account, it is taxed as ordinary income when withdrawn.

But the Internal Revenue Code allows employees a special election to distribute appreciated employer stock out of an employer retirement plan, and have the net unrealized appreciation, i.e., the embedded capital gain, taxed at favorable gains rates outside of the account. This too has its caveats, but as a means of shielding clients from an undue tax bite, it can be an effective — and often overlooked — tool. Knowledge of these complex details is where advisors can play a role in helping clients.

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