If you have company stock in your retirement plan at work, NUA could help you save money on investment taxes. Working with a financial advisor can disclose a number of ways to save on your taxes. Net unrealized appreciation or NUA is a fairly simple concept. It represents a difference in value between the average cost basis of company shares you own and the actual current market value of those shares.
Why does this matter? It has to do with how distributions from k plans and other employer-sponsored tax-deferred retirement accounts are taxed. Be aware, if you roll over your shares into an IRA from a k , you cannot go back and unwind your decision. So, become informed of these and other tax breaks to keep more of your hard-earned money in your pocket. He has passed the Series 65 securities exam. Skip to header Skip to main content Skip to footer.
Home taxes. Tax Breaks. Bryan Philpott, Investment Adviser Representative. This content is subject to copyright. Here's an example of how it works Let's say you work for a publicly traded company that has a stock-option purchase plan allowing you to purchase shares of the company for a discount. Retirement Plans for the Entrepreneur. You need to follow some rules to be able to take advantage of the NUA strategy: You can use it only with the stock originally purchased in the employer sponsored plan.
Also, the NUA is applicable only to company stock. The NUA technique is only available upon the complete distribution of the employer-sponsored account. You don't have to transfer all your company stock you can roll over a portion of your shares to an IRA and apply NUA to the rest , but the entire retirement account must be cleared out. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. However, the caveat is that in order to use the NUA rules, the account owner must report the cost basis of the stock immediately in income for tax purposes, and pay taxes at ordinary income rates.
In addition, if the NUA stock is quickly sold, that long-term capital gains bill immediately comes due, too. They cause the gains to be taxed at lower rates immediately at least if the stock is sold immediately , in addition to triggering ordinary income taxation of the cost basis immediately, when all of those tax liabilities might otherwise have been deferred for years or even decades. Which means deciding whether to take advantage of the NUA strategy or not is really more of a trade-off, than a guaranteed tax savings success.
As a result, the best practice for NUA distributions is to really scrutinize the cost basis of the employer stock inside the qualified plan, and if necessary cherry pick only the lowest-basis shares for the NUA distribution to ensure the most favorable tax consequences. Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners , a turnkey wealth management services provider supporting thousands of independent financial advisors.
The upside of this approach was that the corporation could make a deductible contribution to the employer retirement plan, and by contributing shares the employer could obtain that tax deduction without any cash outlay.
The bad news from the employee perspective is that stock which would have been taxed favorably at long-term capital gains rates if it had just been purchased and grown in the hands of the employee directly, would instead be taxed as ordinary income when coming out of the plan. Thus, as a relief provision and tax-preference for employees to further encourage the strategy for employers , the NUA rules provided a means for employers to still obtain their favorable tax treatment, and for employees to obtain theirs as well.
Example 1. Over the years, Jenny has received annual bonuses of employer stock inside her company profit sharing plan. And under IRS Notice , the net unrealized appreciation will always be taxed at long-term capital gains rates, regardless of the actual holding period of the stock inside the plan. Notably, to meet the requirements for the NUA rules, there are three very specific requirements that must be met:.
This means it must actually be true employer stock, that is able to be transferred in-kind. To complete the in-kind distribution, the employer stock should be transferred directly to a taxable investment i. However, none of the money can stay in the plan past the end of that year.
In order to be eligible for NUA treatment of an in-kind distribution of employer stock, the lump-sum distribution must be made after a triggering event. Notably, this means that an in-service distribution generally does not qualify for NUA treatment, unless it is a distribution that also happens to occur after a triggering event e.
The actual Net Unrealized Appreciation i. If the shares are held past the distribution, any subsequent gains will be taxed at short-term or long-term capital gains rates, based on the holding period from the distribution date until the subsequent sale. If shares are held past the distribution date and losses occur, it will simply reduce the amount of net unrealized appreciation gain reported on the sale although if losses cause the price to fall all the way down below the original cost basis, a capital loss can be claimed.
Only the original cost basis of the shares inside the plan is taxable at the time of distribution. Although notably, the NUA gain will eventually be taxed, as it is not eligible for a step-up in basis at death under Revenue Ruling Five Key Risks of Retirement. Fidelity Podcast Series. Tune-in to Fidelity's latest insights.
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