When planning your retirement, it is important to explore every strategy that could help you maximize your hard-earned savings. One often-missed technique is called Net Unrealized Appreciation, or NUA. If your 401(k) or other employer-sponsored retirement plan holds company stock, understanding NUA could save you thousands in taxes as you transition into retirement.
What Is Net Unrealized Appreciation?
Net Unrealized Appreciation refers to the increase in value of your company stock while it was held inside your retirement plan. If you purchased company shares through your 401(k) at a lower price and those shares are now worth more, the difference between your purchase price (or cost basis) and the stock’s current market value is the NUA.
Example
Suppose over your career you acquired $20,000 worth of company stock in your 401(k), and by the time you retire, that stock grows in value to $100,000. The $80,000 gain is your Net Unrealized Appreciation.
Why Does NUA Matter in Retirement?
When you take a normal distribution from a 401(k), the entire amount is taxed as ordinary income, which can often push you into a higher tax bracket. NUA gives you a valuable exception if you own company stock within your plan.
Here’s how it works:
- When you distribute the shares “in kind” out of the 401(k), you pay ordinary income tax only on the original cost basis (for example, the $20,000).
- The appreciation while it was inside the plan (the $80,000 in our example) will be taxed as a long-term capital gain when you sell the shares—often at a much lower rate than regular income taxes.
The Tax Savings Can Be Significant
Long-term capital gains tax rates are usually 0%, 15%, or 20% depending on your income, compared to ordinary income tax rates that can reach as high as 37%. Taking advantage of the NUA rule could mean keeping more of your retirement wealth.
Who Should Consider an NUA Strategy?
NUA is a powerful option, but it is not right for everyone. It may be a good fit if:
- You have highly appreciated company stock in your retirement plan.
- You are retiring or leaving the company and are prepared to take a lump-sum distribution.
- You want more flexibility with how you sell or gift your appreciated shares.
Important Considerations and Risks
- NUA does not apply to mutual funds or outside investments, only employer stock.
- NUA strategies work best for people with significant unrealized gains.
- Taking a lump-sum distribution may have other tax effects or impact your future required minimum distributions.
- Professional guidance is highly recommended, as the process involves tax law complexity and must be completed correctly.
How Gregory Ricks Total Wealth Can Help
Our wealth advisors at Gregory Ricks Total Wealth have extensive experience helping clients with company stock in their retirement accounts. We have guided many retirees through the NUA process, ensuring compliance with IRS rules and maximizing the after-tax value of their savings.
We carefully review your retirement plan options, analyze your SPD (Summary Plan Description), and model the tax impact for your unique situation. Our goal is to help you transition into retirement with as much of your wealth intact as possible. If you think NUA might apply to you, or you just want a review of your retirement plan options, reach out to our team at Gregory Ricks Total Wealth for a complimentary, no-obligation consultation.
Want to make sure you do not miss out on the NUA tax opportunity? Choosing the wrong rollover method can eliminate this valuable benefit. To learn more about how direct and indirect rollovers impact your employer stock and your NUA strategy, check out this blog: Preserving Your NUA Opportunity: Why Direct vs. Indirect Rollovers Matter With Employer Stock
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