What happens if you leave a job that offered you employer-issued stock or if you experience another triggering life event (such as turning 59½)? This is NUA.
That's where net unrealized appreciation (NUA) strategies come in. There are a few favorable rules to help you determine what to do with those company stocks to potentially minimize your tax bill.
Let's look at what NUA is, how NUA rules work, and some of the potential benefits of an NUA strategy.
What is Net Unrealized Appreciation?
NUA is the difference between how much you paid or contributed to your company stock and its present market value. For example, if you were issued employer stock at $20 per share and it is now worth $40 per share, you would have an NUA of $20 per share ($40 - $20 = $20).
What are the NUA Rules?
NUA is taxed differently than other payments. According to the IRS, "If the lump-sum distribution includes employer securities, the NUA is generally not subject to tax until you sell the securities."1
With this rule from the IRS in mind, a participant may be able to transfer company stock from their previous plan into a taxable investment account without having to treat the entire amount as ordinary income. Instead, they would only have to treat the original amount they paid as ordinary income, which could potentially save them money on taxes.
This strategy can be used when taking distributions out of an original account due to a triggering life event, such as retiring or changing jobs.
The Benefits of an NUA Strategy
The main benefits of utilizing an NUA strategy are tax-related. Because you are only taxed on your contribution amount and not any unrealized gains, you may be able to avoid taxation now and receive favorable long-term capital gains taxes later.
According to the IRS, "The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er)." As you can see, implementing an NUA strategy by rolling your employer stock into a taxable investment account can pay off both in the short term and in the long term.2
It's important to talk to your financial advisor about implementing an NUA strategy because, in addition to these benefits, there are also some considerations and requirements. You must meet special requirements to take full advantage of an NUA strategy. For example, you must receive the stock as a lump-sum, in-kind distribution and then transfer the stock itself into your investment account. There are a few other details to consider, so it's best to work with a financial professional to make sure no details are forgotten.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.