Net Unrealized Appreciation (NUA) is the difference in price you paid (cost basis) for your company stock and its fair market value today.
For some of you, the NUA of your employer stock may be like a shiny, valuable pearl sitting in your 401(k). Much like an oyster, your 401(k) has a purpose. The oyster is a source of food and your 401(k) is a source of income in retirement.
The pearl is an unexpected gem the oyster produces – much like appreciated company stock in your 401(k)!
Let me explain:
You are getting ready to retire and you review your 401(k). You notice that you have 2000 shares of company stock worth $200,000 – $100 a share. You take a close look at the statement and see that the cost basis (how much you paid for the stock) is $14,000 or an average of $7 a share. Over your career, your company stock has appreciated $184,000! You feel pretty good about that but then feel a little regret (shellfish allergy?!) because if you had purchased those shares outside of your 401(k), you would pay long-term preferred tax rates (0-20%) when you sell the shares. When you sell the shares and distribute from the 401(k), you will pay ordinary income tax (10-37%).
Then you see the gleam of the pearl! The Net Unrealized Appreciation strategy allows you to pull the company stock out of the 401(k), pay ordinary income tax on the basis of $14,000 and preferred capital gains tax on the additional $184,000. Not only can you save on taxes, but you will have more flexibility with the stock now that it’s owned in a taxable account. You can sell shares for living expenses, gift them to family, donate shares to charity. There are many variables to consider when deciding if NUA is right for you, please reach out to your Wealth Advisor to review your plan before making any decisions around this strategy.
The below chart highlights the potential taxes saved using the NUA strategy. The taxpayer is in the 32% marginal tax bracket and 15% capital gains bracket. In this simple view, the taxpayer distributes the 401(k) and sells all the stock all on day 1 for a tax savings of $31,260. That kind of tax savings is a real gem!
Please note that each taxpayer’s situation is different and needs to be analyzed before deciding on the NUA strategy. Please discuss any tax planning strategies with your CPA.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.