If you are a long-time listener you know that we like to go through the nuances of financial planning that may be valuable to you. In this episode, we take a look at net unrealized appreciation (NUA).
We walk through:
- What it is
- Who could benefit from it
- The benefits and pitfalls of using NUA
You won’t want to miss out on hearing one of our classic fictional case studies involving Freddie Krueger.
Outline of This Episode
- [1:20] What is net unrealized appreciation?
- [3:45] A case study
- [8:40] The four triggering events
- [11:15] Benefits of NUA
- [15:44] The drawbacks
What is net unrealized appreciation?
Net Unrealized Appreciation (NUA) is a simple concept, but there can be complexity in the mechanics of applying the rule and in the compliance checklist.
What this term refers to is the increase in value of the employer stock from the time it was acquired in your 401k retirement plan until the date of distribution to the plan participant.
You can use NUA when you are separating from your employer due to retirement or another qualified reason [reaching age 59.5, death, or disability]. It works when you can take a lump sum from your 401k plan and roll it over into an IRA. However, if that plan includes highly appreciated stock then there is a tax rule that allows you to withdraw the stock from the plan and pay regular income tax on what you paid for the stock. Then you can pay lower long-term capital gains rates on the appreciation.
Remember though, age matters with this transaction. If under age 59.5 and not yet age 55 or older upon leaving your employer, there will be a 10% tax penalty on the basis withdrawal of your stock in addition to the ordinary income tax due. So it’s important to understand your tax bracket when completing this maneuver.
NUA could save you money in taxes
NUA allows you to move the stock to a brokerage account and defer the tax on the net unrealized appreciation until you sell that stock position. When you do so you’ll only pay tax at your current capital gains rate. This could provide significant tax savings if you have highly appreciated employer stock in your 401K.
Oftentimes people lean toward the direct rollover of the entire 401K, but if you have highly appreciated employer stock, you may want to reconsider. Listen in to learn how Freddie Krueger could use NUA to free up some assets and save money on taxes.
Things to keep in mind when using NUA
There are a few things you’ll need to keep in mind if you plan on using NUA to save on taxes.
- The first thing to consider is if you have highly appreciated company stock. This includes stock that was purchased at a low price and is now valued at a much higher rate.
- You’ll also need to have a triggering event. This could be reaching age 59 ½, separating from service at your employer, a disability, or death.
- Another important aspect is that this event must occur in only one tax year.
It is extremely helpful to have a financial advisor walk you through the intricacies of using NUA. Listen in to discover if NUA could help you improve your financial flexibility.
- Kitces – Why The Net Unrealized Appreciation (NUA) Rules Aren’t Always A Great Deal
- Ed Slott – 10 NUA Q&As