Company Stock in Retirement Plan, company stock and retirement plan, net unrealized appreciation, NUA stock

 

If you are changing jobs or retiring, and shares in your company stock are part of your retirement plan, you have an additional option to consider when you transfer this asset out of the company plan.  Net Unrealized Appreciation (NUA) is a strategy which may significantly reduce the tax liability on your retirement plan.

What is Net Unrealized Appreciation (NUA)?

Upon switching jobs or retiring, you are faced with the decision of how you’d like to handle your retirement assets. One option is to “rollover” the assets into an Individual Retirement Account (IRA), which would be a tax-deferred account. However, the full value of the asset would be taxed as ordinary income when you start making withdrawals, usually when you retire.

If you have company stock in your retirement plan, you also have the option of moving the employer stock to a taxable account.  In this scenario, you are taxed (income tax) based upon the worth of the stock at the time of acquisition. Assuming the stock has appreciated or gone up in value, the remaining value of the stock is the net unrealized appreciation (NUA) and this amount is not taxed until you sell the stock. At that time, the NUA would be taxed according to the capital gains rates for your tax bracket.

How Does NUA Work?

In general, to qualify, you must be leaving your employer, you must take the distribution as a lump sum payment (equal to the stock value at the time you acquired it, not the stock’s current value) and you must have purchased the stock using pre-tax money. NUA is only applicable to the portion of your plan that comes from employer company stock. Any other assets in the plan would have to be handled differently.

NUA is most beneficial when the company stock has appreciated significantly in the time since you acquired it. If you are under age 59½, a penalty of 10% on the distribution amount may be incurred. In addition, if the NUA realized is only a small amount, or if the stock has gone down in value, it may make more sense for you to roll the full amount over into an IRA.

What’s In It for Me?

To put it simply, by NUA may be an opportunity to save on taxes over the long run.

For example, assume you are over age 65 and you are retiring:

  • Current value of company stock = $100,000
  • Cost basis of this stock (the amount you paid) = $25,000
  • NUA on the company stock = $75,000.

In this instance, you pay your current income tax rate on the $25,000. Five years later, you are ready to sell the stock at its current value of $125,000. The new NUA balance of $100,000 (which includes the amount the stock has appreciated since you retired) would be taxed at the appropriate long-term capital gains rate, which is typically much lower than your income tax rate.

NUA does not make sense for everyone.  There may be little or no tax savings if the stock has not appreciated much, or if you would need to pay an early withdrawal penalty (10% if under age 59 1/2), for example.  I can help you run the numbers for your situation.

 

Changes in tax laws may occur at any time and could have substantial impact upon each person’s situation.  Discuss tax or legal matters with the appropriate professional.