If you read our recent article about Net Unrealized Appreciation (NUA), you know this strategy can provide substantial tax savings for retirees who own company stock inside their retirement plans. However, there are crucial details that can make or break your ability to use NUA. It all comes down to how and when you move your stock out of your employer-sponsored retirement plan. The choice between direct and indirect rollovers, as well as important timing considerations, could affect your eligibility for this unique tax break.
Understanding Rollovers: Direct vs. Indirect
Direct Rollover:
In a direct rollover, assets move straight from your employer plan (like a 401(k)) to another qualified account, such as an IRA or another retirement plan. You never take possession—the transfer happens institution to institution.
Indirect Rollover:
Here, the assets are distributed directly to you. You typically have 60 days to deposit the funds into an IRA or other eligible account, but always verify with your plan provider as soon as possible. If you miss this deadline, you may owe income taxes and penalties.
Why NUA Requires Special Handling
For most retirement assets, either rollover method can work. When it comes to the unique NUA tax opportunity for company stock, the path you choose is far more important.
NUA is lost if you move company stock into an IRA—whether via a direct or indirect rollover. Instead, to preserve the NUA benefit, you must request an “in-kind” distribution of your company stock directly into a taxable brokerage account, not an IRA. You will pay ordinary income tax only on the cost basis (what you paid for the shares), while the appreciation will be taxed at long-term capital gains rates when you eventually sell the stock (Fidelity).
The Importance of Timing
Timing is critical if you want to use NUA. According to the IRS, to qualify for NUA tax treatment, you must:
- Distribute your entire vested balance in your plan within a single tax year (you do not have to take all distributions at the same time, but you must zero out the account within that year).
- Experience a “triggering event,” such as separation from service, reaching age 59½, disability, or death.
- Take the distribution before any required minimum distributions (RMDs) other than those for the current year.
- Ensure company stock is distributed “in kind” as shares, not cash.
Missing these timing requirements, or triggering an automatic rollover or RMD before completing your NUA strategy, can disqualify you from NUA benefits. Also, some plans have their own deadlines that may require you to act within 30 or 60 days of leaving your job or reaching retirement age.
When Does NUA Make Sense?
NUA can make a big difference when:
- Your company stock has a low cost basis relative to its market value.
- The spread between your ordinary income tax rate and capital gains rate is substantial.
- You expect your future income to be the same or higher, or want to reduce future RMDs.
- You are in your “income gap” years, before Social Security or pension income begins (Fidelity).
However, utilizing NUA may not be the best choice if you expect retirement income to fall, or if the company stock’s appreciation is limited. Work with a professional to analyze your specific tax scenario.
How We Can Help
At Gregory Ricks Total Wealth, our advisors routinely help clients navigate the NUA strategy, reviewing both tax consequences and the necessary steps. Ready to review your options or need help with the paperwork? Contact us at Gregory Ricks Total Wealth for professional guidance every step of the way.
READ MORE:
What to Do With Your Old 401(k) When You Change Jobs
Gregory Ricks Total Wealth Financial Services: 401(k) Rollovers https://gregoryricks.com/financial-services/401k-rollover/
WATCH:
Winning at Life Podcast S1 EP8: Roth IRA Playbook for Tax-Free Retirement https://youtu.be/Qk2nIcl-RmM?si=A7vy_LXzWCc2NKbx
This article is meant to be general and is not investment or financial advice or a recommendation of any kind. The opinions and other information contained in this article are subject to change based on the market or other conditions. Please consult your financial advisor before making financial decisions. For more detailed information, contact a financial advisor with Gregory Ricks & Associates, Inc. Investment advisory products and services through AE Wealth Management, LLC. (AEWM). Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 4197958 – 7/26