P&G Employees Face Tax Trap in Employer Stock Rollover

Procter & Gamble (NYSE: PG) has been restructuring and reducing its workforce, cutting about 5,000 jobs so far. This has left many employees with a decision to make when it comes to their company stock in their 401(k). A recent change in tax laws has made it more important than ever for these workers to understand the implications of rolling over their employer stock into an individual retirement account (IRA).

The issue lies in the Net Unrealized Appreciation (NUA) tax treatment, which allows employees to defer taxes on the appreciation of their company stock. However, if they roll over their shares into an IRA first, this opportunity generally disappears.

For example, let's say a 60-year-old Cincinnati employee has a block of P&G shares worth $400,000 with a cost basis of $80,000. If she takes the shares in kind as part of a qualifying distribution, the $80,000 basis is taxed as ordinary income, while the $320,000 of NUA is deferred until she sells the shares and is then treated as long-term capital gain.

Rolling over the stock into an IRA instead would mean that future taxable withdrawals come out as ordinary income, which can create a meaningful rate difference. At a 24% ordinary-income rate versus a 15% long-term capital-gains rate, the difference on $320,000 is about $28,800.