Net Unrealized Appreciation (NUA)

Net Unrealized Appreciation (NUA) is a tax strategy that can be used when distributing employer-sponsored retirement plan assets, such as company stock, to plan participants. NUA allows participants to take advantage of potentially favorable tax treatment on the appreciated value of the employer stock.

Here is how Net Unrealized Appreciation works:

  1. Employer Stock: If you hold company stock within your employer-sponsored retirement plan, and the value of that stock has appreciated over the years, you have unrealized gains within the plan.
  2. Distribution: When you are eligible for a distribution from the retirement plan, such as when you retire or leave the company, you have the option to transfer the employer stock to a taxable brokerage account.
  3. Tax Treatment: The key advantage of the NUA strategy is that you only pay ordinary income tax on the Cost Basis of the employer stock. The appreciated value (NUA) is not subject to ordinary income tax at the time of distribution.
  4. Capital Gains Tax: Instead of paying ordinary income tax on the appreciated value, you defer taxation on the NUA until you decide to sell the stock. When you eventually sell the stock, the NUA is subject to Long-Term Capital Gains tax rates, which are typically lower than ordinary income tax rates. This can result in significant tax savings.
  5. Other Considerations: It is important to note that there are specific rules and requirements associated with NUA. For instance, you must take the distribution of the employer stock as a lump-sum distribution, and you cannot roll the stock over into an Individual Retirement Account (IRA).

Net Unrealized Appreciation (NUA) can be a complex strategy, and its suitability depends on your individual financial situation and tax circumstances. Before making any decisions related to Net Unrealized Appreciation, should consult with a CERTIFIED FINANCIAL PLANNER™ professional to understand the tax implications, and make an informed decision which may significantly impact your personal financial situation.