The NUA Advantage

Many corporations offer their employees different kinds of incentives and/or bonuses. One of these is company stock held in a 401(k) or other qualified pension plan. If you hold stock from a previous employer in a qualified plan, you are eligible, under the IRS code, for special tax treatment on those assets based upon a concept called Net Unrealized Appreciation (NUA).

 To put it simply, if you rollover the stock to an IRA, the company stock's NUA will be taxed at your ordinary income tax rate when you distribute the stocks.

 If, however, you transfer the company stock in kind to a regular brokerage account, your ordinary income tax rate will apply to the basis (which is recognized as a distribution). But, the long-term capital gains tax rate in effect at the time you eventually sell the stock will apply to the NUA upon distribution. 

When you decide to sell those shares, you will only pay the capital gains tax rate, not ordinary income tax on the appreciation. This rule holds true for whenever you choose to sell – once you trigger an NUA strategy, the 1 year holding period for long-term capital gains treatment is automatically satisfied. Your personal retirement distribution specialist and tax professional can explain to you some of the other stipulations in the Tax Code involving NUA.

These include:

• There must be a triggering event - separation from service, turning 59½, full disability (if self-employed)

or death.

• The stock must have been purchased with pre-tax contributions or employer matches.

• To qualify for the break, you must take the entire pension plan account balance in a lump sum distribution over the course of one tax year – all assets must be distributed, not just the stock.

• Dividends paid on the stock are not tax-deferred.

• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your advisor can describe for you how step-up in basis works, and how it may affect you and your heirs. Keep in mind that even though an NUA strategy may be available to you, it may not necessarily be wise or appropriate for you. 

You shouldn’t make an NUA decision without first consulting with your personal advisors to fully assess your individual objectives, taking into account crucial factors like age, tax implications, income requirements, retirement needs and any potential risk or downside with respect to an NUA strategy. Especially in light of the 2012 American Taxpayer Relief Act, it is important to carefully analyze the pros and cons of an NUA strategy in your particular situation before committing.