When you leave your company, you face many financial decisions. One tax strategy often gets overlooked. Net Unrealized Appreciation in 401k plans could potentially save you thousands on taxes when it comes to company stock.
Table of Contents:
- What is NUA Strategy?
- When NUA Works Best
- Net Unrealized Appreciation Triggering Events
- Common Mistakes
- Should You Use NUA?
- Next Steps
What is NUA Strategy?
Net unrealized appreciation lets you transfer company stock from your 401k to a regular brokerage account instead of a traditional rollover. You pay ordinary income tax only on what you originally paid for the stock. The appreciation gets taxed later at capital gains rates when you sell.
Say you bought company stock for $50,000 over the years. Today it's worth $300,000. With a normal net unrealized appreciation rollover to an IRA, you'd eventually pay ordinary income tax on the full $300,000 when you withdraw it.
With NUA, you pay ordinary income tax on just the $50,000 when you transfer the shares. The $250,000 appreciation gets capital gains treatment when you sell.
When NUA Works Best
NUA makes sense in specific situations:
Low cost basis with big gains. You bought stock cheap through payroll deductions or received it as contributions. The current value far exceeds what you paid.
High tax bracket now. You're in a high ordinary income bracket but expect lower rates when you sell the stock.
You want to keep the stock. Some executives prefer holding company stock rather than diversifying immediately.
Estate planning benefits. Stock in taxable accounts gets a step-up in basis at death. Retirement accounts don't.
Net Unrealized Appreciation Triggering Events
You must take your entire 401k balance as a lump sum within one calendar year. This triggering event happens after you leave your job, turn 59½, or become disabled.
The company stock transfers directly to a brokerage account. You can't sell it first within the 401k. You pay ordinary income tax on your cost basis that year. Everything else in your 401k can roll to an IRA normally.
For net unrealized appreciation tax reporting, you'll receive Form 1099-R showing the cost basis as taxable income.
Common Mistakes
Selling stock in the 401(k) first. Once you sell, you lose NUA eligibility.
Taking partial distributions. You must distribute your entire account balance.
Poor record keeping. You need documentation of your cost basis.
Bad timing. The ordinary income from your cost basis might push you into a higher tax bracket.
Should You Use NUA?
Work with an advisor who regularly evaluates NUA opportunities. They should calculate potential tax savings, review your current and future tax brackets, and consider concentration risk.
The decision depends on your specific situation. For executives with significant company stock appreciation, NUA can provide substantial tax savings.
Next Steps
If you're approaching a net unrealized appreciation triggering event with company stock in your 401k, consider this NUA strategy before doing a standard rollover. This approach requires coordination between HR, your plan administrator, and your financial advisor.
Schedule a conversation to discuss whether net unrealized appreciation in 401k plans fits your wealth management strategy.
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