Company B just announced the spin-off of their e-commerce division. Liking spin off stocks and thinking of investing, you wonder … How do I make my spin off tax free?
Well, fellow compounders, read on for some useful ideas.
How Do I Make My Spin Off Tax Free?
You can make your spin off tax free by purchasing your spin-off shares within a Roth IRA or Roth 401(k) account. These retirement savings vehicles offer capital gains and dividend tax advantages. Here’s how it works:
Retirement Account Tax Treatment – Roth retirement account contributions are made with after-tax dollars meaning taxes have been deducted prior to your account deposit and subsequent investment.
Spin off Tax Treatment - Your spin off investment is made within your Roth IRA or Roth 401(k) account. Capital gains and dividends are not taxed within your account and if withdrawn as a qualified distribution, they are tax free.
Qualified Distributions – Roth withdrawals are tax free qualified distributions when the following criteria are met:
- Your account has been open for a minimum of five years.
- You are 59 ½ years old or permanently disabled.
- Funds are to be used for a first-time home purchase. The dollar limit is $10,000 per account holder. Two account holders on the same account can withdraw up to $20,000, provided all other requirements are met.
Contribution Rules and Limits – Roth accounts are investment accounts that have contribution and withdrawal requirements and limits. To successfully answer, how do I make my spin off tax free? the prudent investor familiarizes herself with the required criteria and obtains financial and tax advice prior to making an investment.
What is the Cost-Basis of a Tax Free Spin Off?
The cost-basis of a tax free spin off is effectively zero. Contributions to your Roth retirement account were made with after-tax dollars, which means you’ve already paid taxes on your funds.
These net tax deposits generally have no tax reporting requirements, and subsequently, no need to calculate the cost-basis on your account investments.
The after-tax funds used to purchase the spin off shares and the accumulation of tax free capital gains and dividend income within the account, coupled with tax free qualified distribution renders a zero cost-basis.
Though Roth investments have an original purchase price, the cost-basis concept is not relevant and does not have the same taxable account significance due to the tax free nature of the untaxed qualified distributions.
How do I make my spin off tax free? You perform your due diligence and decide Company B is a solid investment. To ensure that your spin off investment is tax free, you invest through a Roth account. Your diligent research indicates attention should be paid to the following steps:
- Gain a thorough understanding of the spinoff
- Familiarize yourself with the relevant judicial tax laws
- Confirm the spin off qualifies as a tax free investment within your jurisdiction
- Know the required holding period for favorable spin off tax treatment
Spin off investing within a Roth IRA or Roth 401(k) allows you tax free investment growth, provides retirement savings advantages, and is the best answer to the question; How do I make my spin off tax free?
Read next: What Is the Difference Between a Spin-off and a Spin Out?
