Net Unrealized Appreciation – A strategy for company shares held inside your 401(k)

Net Unrealized Appreciation (NUA) – What is it?

• Net unrealized appreciation (NUA) is the difference between the original cost basis and current market value of shares of employer stock inside of a qualified employer retirement plan 401(k).

• The IRS offers a provision that allows for a more favorable capital gains tax rate on the NUA of employer stock upon distribution

This strategy can offer tremendous benefits if you hold shares of company stock (often received as compensation, bonus or purchased via a stock purchase plan) that has resulted in a low-cost basis compared to today’s market value.

Typically, distributions from a 401k are taxed as ordinary income in the year of the distribution. Ordinary income is taxed at a higher rate (up to 39.6%) compared to long term capital gains (0-20%). Utilizing the NUA strategy effectively converts the gain in the stock from ordinary income to long term capital gains which can produce substantial tax savings when implemented correctly.

Example

• 401k total value = 1.25mm

• Value of mutual funds 750k

• Current value of company stock 500k

• Cost basis of company stock 100k

NUA : 500 – 100 = 400k

Ordinary Income Tax rate: 28%

Long Term Capital Gains Rate: 15%

Tax NOT using NUA: 500 x .28 = $140,000 in taxes

Tax USING NUA: (100 x .28) + (400 x .15) = 28,000 + 60,000 = $88,000 in taxes

The Result: $52,000 in tax savings

This article outlines the very basics of the Net Unrealized Appreciation (NUA) strategy. The rules around NUA are very strict and need to be executed correctly for the strategy to be effective. Each person’s tax situation is different and the NUA strategy might not be right for you. Careful consideration is advised. If you would like to explore if this strategy might be appropriate, please contact me directly to discuss your situation 203-557-0291 or Derek@Newpointewealth.com

This information is not intended to be a substitute for specific individualized tax advice. LPL Financial does not provide tax advice.

Newpointe Wealth is does not provide tax advice. Consult your CPA or tax advisor before utilizing the NUA strategy.