Designed for individuals with highly appreciated company stock in their company retirement plan, net Unrealized Appreciation (NUA) is a little-known and rarely used strategy that can significantly lower taxes due on 401(k) and other qualified plans.
How much can it save? Take the example of an executive with $1,000,000 of company stock in her 401(k), with a cost basis of $100,000.
What is NUA & how does it work?
NUA refers to the appreciation of company stock in a qualified account such as a 401(k). The chart below illustrates the above example where the total value of company stock is $1,000,000. Upon withdrawal from the qualified plan, income tax is paid on the $100,000 cost basis, while capital gains tax is paid on the $900,000 appreciation. Careful attention must be paid to NUA rules in order to obtain favorable tax treatment. Some of these rules include:
- The stock must be withdrawn from the qualified plan “in-kind”. It cannot first be rolled into an IRA
- All assets must be distributed from the plan in the same calendar year (Some exceptions apply)
- Assets that are not applicable to NUA can be rolled into an IRA. For example, if the executive in our example has another $200,000 of the 401(k) in a mutual fund, the mutual fund can be rolled into an IRA
- If multiple plans exist with the same company (such as a 401(k) and Employee Stock Option Plan (ESOP), all assets must be taken from all plans in the same year.
NUA is not always the right strategy. People who want to defer taxes as long as possible and who wish to diversify out of company stock may be better served by a rollover IRA, although many other considerations apply. But for those who can take advantage of it, NUA can be a powerful tax reduction strategy, as long as the rules are carefully applied. Careful consultation with your accountant and financial advisor is recommended before moving forward with NUA.
Bob Clark, CFP®, CIMA®, CPWA®
Senior Vice President / Wealth Management, Financial Advisor
July 2021
