NUA Strategy, Part 1: An Undiscovered Pearl in Your 401(k)
Net unrealized appreciation (NUA) is the difference in the price you paid (cost basis) for your company stock and its fair market value today.1
The NUA of your employer stock can be like a shiny pearl sitting in your 401(k). Think of your 401(k) as the oyster—it shelters the growth of your retirement savings from tax and provides a source of income in retirement. The pearl is an unexpected gem that the oyster produces—a valuable way to make the most of your company stock.
Let me explain using an example
You’re getting ready to retire and decide to review your 401(k). You notice your company’s stock is currently valued at $100 a share, so the 2,000 shares that you hold are now worth $200,000. You take a close look at your account statement and see that the cost basis (how much you paid for the stock) is $14,000, which is an average of $7 a share. Over your career, your company stock has appreciated by $186,000. Although you feel pretty good about that gain, you also experience a little regret because if you had purchased those shares outside of your 401(k), you would normally pay long-term preferred tax rates (0%–20%)2 when you sell those shares. But when you sell the shares and distribute the proceeds from your 401(k), you will most likely pay the much higher ordinary income tax rate (10%–37%).3
Then you see the gleam of the pearl. The net unrealized appreciation strategy allows you to pull the company stock out of your 401(k) and pay ordinary income tax on the basis of $14,000 and preferred capital gains tax on the additional $186,000 that’s been transferred to a taxable investment account.4
Not only can you save on taxes, but you will typically have more flexibility with the stock now that it’s owned in a taxable account. Some examples of this flexibility are selling the shares to use the proceeds as you wish, gifting them to family and donating them to charity.
There are many variables to consider when deciding if an NUA strategy is right for you, so please reach out to your Corient Wealth Advisor to review your plan before making any decisions regarding this option.
What is the potential tax savings when using an NUA strategy?
The chart below illustrates the potential tax savings. In this example, we assume a taxpayer is in the 32% marginal tax bracket and 15% capital gains tax bracket. By selling their stock and distributing the proceeds from their 401(k), this taxpayer benefits from a tax savings of $31,260. A real gem, indeed.
Please note that each taxpayer’s situation is different and needs to be analyzed before deciding to take advantage of the NUA strategy. To help determine if your appreciated company stock may become a valuable pearl, please discuss any tax planning strategies with your CPA.
For more strategies related to NUA, please read the second part of this blog mini-series, “NUA Strategy, Part 2: Put Your After-Tax Contributions to Work.”
1 https://institutional.fidelity.com/app/item/RD_13569_13873/understanding-net-unrealized-appreciation-nua.html
2 https://www.irs.gov/taxtopics/tc409
3 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
4 https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/
ABOUT THE AUTHOR
Abigail Rosen, MS Financial Planning
Abby is a Partner, Wealth Advisor in our Morristown, NJ, office. She is a CERTIFIED FINANCIAL PLANNER™ professional with over 17 years of experience in the financial industry. Prior to her career in finance, Abby was an officer in the United States Navy. Abby specializes in working with corporate executives to help them take full advantage of their available benefits, implement with respect to employer stock concentrations and manage their stock option strategies. She has a designation in Global Financial Planning. Previously, she served at legacy firm RegentAtlantic as a Wealth Advisor and Co-Head of the Corporate Executives Group.
She graduated with a Bachelor of Arts from the College of the Holy Cross and received a Master of Science (distinction) in Financial Planning from Bentley University. She was 2020 Citizen of the Year for her work as treasurer of the New Jersey Psychological Association Foundation and is treasurer of the Harding Township Educational Foundation (HTEF) and a Girl Scout troop leader.
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