Weekend Read – NUA, A Tax Break for Company Stock
02/24/2025I take pride in personally crafting each of these emails. Unlike many others in the industry who rely on prewritten content, I write these myself from scratch. My goal is to boil down complex concepts and share relevant news in an easy-to-understand format. I hope you find them both informative and enjoyable.
If you have employer stock inside your 401(k), you may have a tax-saving opportunity that many people overlook: Net Unrealized Appreciation (NUA) is a tax strategy that can significantly reduce the taxes you pay when withdrawing or rolling over employer stock from your retirement plan. Let’s break it down.
What Is Net Unrealized Appreciation (NUA)?
Net Unrealized Appreciation refers to the increase in value of employer stock inside your 401(k) since it was purchased1. If you own company stock within your 401(k), you have two options when you retire or leave your job:
Requirements to Qualify for NUA
To take advantage of NUA, certain conditions must be met. First, the company stock in your 401(k) must be transferred in kind to a taxable brokerage account, meaning the shares are moved as they are, without being sold. Additionally, the distribution must be part of a lump-sum withdrawal, meaning the entire balance of your 401(k) must be distributed in a single tax year—including both the stock and any other assets, which can be rolled into an IRA1.
Timing is also crucial. The transfer must take place within the same calendar year, and the distribution must be triggered by a qualifying event, such as leaving your employer, reaching age 59½, becoming disabled, or passing away (with the NUA benefit then applying to beneficiaries) 1.
When these conditions are met, the tax benefits of NUA apply. You will owe ordinary income tax only on the original cost basis of the stock—the amount originally paid for it—at the time of transfer. The appreciation, known as the NUA, will be taxed at long-term capital gains rates when you sell the stock, which are typically much lower than ordinary income tax rates1.
An Example
Suppose you have $200,000 of company stock in your 401(k), but your company originally purchased the stock for $50,000. If you use the NUA strategy, you will pay ordinary income tax on the $50,000 cost basis. Assuming a 24% tax rate, that results in $12,000 in upfront taxes. The remaining $150,000 of appreciation will be taxed at long-term capital gains rates, which for most people is 15%, leading to $22,500 in capital gains tax when the stock is sold. This brings the total tax paid to $34,500.
In contrast, if you were to roll everything into an IRA instead, the entire $200,000 would eventually be taxed as ordinary income upon withdrawal. Assuming the same 24% tax rate, that would result in $48,000 in total taxes—which is $13,500 more than under the NUA strategy.
While this example highlights the potential tax savings of the NUA strategy, determining whether it’s the right move requires careful analysis. The upfront tax might outweigh the long-term benefits, depending on your specific situation. Factors to consider include your current and future tax brackets, how soon you plan to sell the stock, whether you have other sources of income, and your overall estate planning goals. A thorough review of these elements can help determine if the extra tax you pay upfront is justified by the potential savings down the road.
Final Thoughts
NUA is a powerful strategy that can help you minimize taxes on your 401(k) withdrawals if you have highly appreciated employer stock. But it’s not a one-size-fits-all solution, it requires careful planning and an understanding of your tax situation.
If you have company stock inside your retirement plan and are unsure of your best approach, let’s talk. Making the right choice could mean keeping more of your hard-earned retirement savings.
If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.
Enjoy your weekend,
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
w. rafferwealthmanagement.com
e. [email protected]
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
The case study presented is provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals, and results, may differ.
Individuals are encouraged to consult their tax and legal advisors (a) before establishing or changing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice.
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If you have employer stock inside your 401(k), you may have a tax-saving opportunity that many people overlook: Net Unrealized Appreciation (NUA) is a tax strategy that can significantly reduce the taxes you pay when withdrawing or rolling over employer stock from your retirement plan. Let’s break it down.
What Is Net Unrealized Appreciation (NUA)?
Net Unrealized Appreciation refers to the increase in value of employer stock inside your 401(k) since it was purchased1. If you own company stock within your 401(k), you have two options when you retire or leave your job:
- Roll everything into an IRA – This defers taxes, but all withdrawals are taxed as ordinary income (like a paycheck)1.
- Use the NUA strategy – This allows you to pay lower capital gains tax on the appreciation of your company stock instead of ordinary income tax. When you transfer the stock to a taxable brokerage account, you will immediately owe ordinary income tax on the cost basis—the original purchase price of the stock. However, the appreciation, known as the NUA, will be taxed at long-term capital gains rates when you sell the stock, which are typically lower than ordinary income tax rates1.
Requirements to Qualify for NUA
To take advantage of NUA, certain conditions must be met. First, the company stock in your 401(k) must be transferred in kind to a taxable brokerage account, meaning the shares are moved as they are, without being sold. Additionally, the distribution must be part of a lump-sum withdrawal, meaning the entire balance of your 401(k) must be distributed in a single tax year—including both the stock and any other assets, which can be rolled into an IRA1.
Timing is also crucial. The transfer must take place within the same calendar year, and the distribution must be triggered by a qualifying event, such as leaving your employer, reaching age 59½, becoming disabled, or passing away (with the NUA benefit then applying to beneficiaries) 1.
When these conditions are met, the tax benefits of NUA apply. You will owe ordinary income tax only on the original cost basis of the stock—the amount originally paid for it—at the time of transfer. The appreciation, known as the NUA, will be taxed at long-term capital gains rates when you sell the stock, which are typically much lower than ordinary income tax rates1.
An Example
Suppose you have $200,000 of company stock in your 401(k), but your company originally purchased the stock for $50,000. If you use the NUA strategy, you will pay ordinary income tax on the $50,000 cost basis. Assuming a 24% tax rate, that results in $12,000 in upfront taxes. The remaining $150,000 of appreciation will be taxed at long-term capital gains rates, which for most people is 15%, leading to $22,500 in capital gains tax when the stock is sold. This brings the total tax paid to $34,500.
In contrast, if you were to roll everything into an IRA instead, the entire $200,000 would eventually be taxed as ordinary income upon withdrawal. Assuming the same 24% tax rate, that would result in $48,000 in total taxes—which is $13,500 more than under the NUA strategy.
While this example highlights the potential tax savings of the NUA strategy, determining whether it’s the right move requires careful analysis. The upfront tax might outweigh the long-term benefits, depending on your specific situation. Factors to consider include your current and future tax brackets, how soon you plan to sell the stock, whether you have other sources of income, and your overall estate planning goals. A thorough review of these elements can help determine if the extra tax you pay upfront is justified by the potential savings down the road.
Final Thoughts
NUA is a powerful strategy that can help you minimize taxes on your 401(k) withdrawals if you have highly appreciated employer stock. But it’s not a one-size-fits-all solution, it requires careful planning and an understanding of your tax situation.
If you have company stock inside your retirement plan and are unsure of your best approach, let’s talk. Making the right choice could mean keeping more of your hard-earned retirement savings.
If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.
Enjoy your weekend,
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
w. rafferwealthmanagement.com
e. [email protected]
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
The case study presented is provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals, and results, may differ.
Individuals are encouraged to consult their tax and legal advisors (a) before establishing or changing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice.
AdTrax 7660459.1 Exp 2/26