Do you own 𝔍c൲ompany stock in your 401(k) or a similar retirement account? If so, you might benefit from net unrealized appreciation (NUA) on your taxes.

The NUA is the difference between what your company stock was worth when you first got it and its value when sold. NUA applies only to your employer's stock because these shares have a distinct cost basis since they ꧋are often rec🦄eived through direct employer contributions, such as matches or stock bonuses.

The appreciated value is then taxed at the more favorable long-term 澳洲幸运5官方开奖结果体彩网:capital gains rate. Gains from other 401(k) assets, like investments in mutual funds or exchange-traded funds (ETFs), are taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income when they are eventually sold. NUA offers significant tax savings, especi🐠ally for high-income earners with 🉐a substantial amount of company stock in their retirement plans.

What Is Net Unrealized Appreciation (NUA)?

Investors who own stock in an employer can use NUA to shift part of their tax liability from ordinary income tax rates to the more favorable long-term capital gains rate. For most retirement assets, investments grow tax-deferred and lower the employee's taxable income in the year of each contribution. However, when this tax deferral eventually comes due, it would be a 澳洲幸运5官方开奖结果体彩网:distribution from a retirement account, which is typically taxed as ordinary income at the account owner's 澳洲幸运5官方开奖结果体彩网:marginal tax rate at retirement—regardless of whether the distributed assets are stocks, bonds, mutual funds, or any other investment type. This means that even if the appreciation is from long-term 澳洲幸运5官方开奖结果体彩网:capital gains within the account, all distributions are treated as ordinary income for tax purposes.

NUA is a consideration when employees take a lump-sum distribution of company s💛tock from their qualified retirement plan. For example, an employee with $100,000 worth of employer stock in their 401(k) plan might have been originally granted 5,000 shares at $4.00 per share, making the cost basis $20,000. ꧂The $80,000 difference is the NUA.

Without the NUA strategy, if the employee were to sell the entire amount, they would pay ordinary income tax rates (which can be as high as 37%) on the full amount. However, by implementing the NUA strategy, they would pay ordinary income tax only on the cost basis ($20,000), while the $80,000 in gains would be taxed at the long-term capital gains rate, which maxes out at 20%.

How NUA Is Taxed

Under the Internal Revenue Code, when a qualifying distribution is made from a tax-deferred retirement plan that includes employer stock, the IRS permits a split-taxation method. This means the distribution is divided into two components:

1. The cost basis: The original cost of the stock, which is taxed as ordinary income in the year of the distribution.
2. Net unrealized appreciation: The increase in value from the cost basis to the market price at the time of distribution is taxed as 澳洲幸运5官方开奖结果体彩网:long-term capital gains when sold.

Example

Suppose you've built up $400,000 in company stock in your 401(k). You originally received 5,000 shares when they were worth $16 each—that amounts to a $80,000 cost basis. The $320,000 difference? That's your NUA, which won't be taxed (as capital gains) until the shares are sold.

If the stock keeps going up after the distribution, that will be taxed as usual: short-term gains if held less than a year after distribution or long-term capital if held longer.

NUA Requirements and Distribution Rules

Before using the NUA strategy, you'll need to meet a few key conditions. You can only take advantage of NUA when certain life events happen, such as:

• Separation from service (for employees)
• Reaching age 59½
• Total disability (applicable only for self-employed individuals)
• Death

Second, you must take the stock as a lump-sum distribution, meaning the entire balance of all qualified plans of the same type must be distributed within a single tax year. However, this doesn't mean you have to take all your company stock at once. You can split the distribution into three streams:

1. Distribute it all at once: You can take a direct distribution of some or all the company stock as cash to immediately capture the NUA tax treatment, but you won't benefit from any future price appreciation in the stock.
2. Roll it over into a retirement account: You can 澳洲幸运5官方开奖结果体彩网:roll over some of the company stock into an 澳洲幸运5官方开奖结果体彩网:individual retirement account. This allows you to keep deferring taxes, but you would forfeit the NUA benefit. That is, future withdrawals would be taxed as ordinary income.
3. Roll it over into a regular brokerage account: You can roll over some of the company stock into a taxable brokerage account. This preserves the NUA advantage—only the cost basis is taxed at distribution, and future gains benefit from favorable long-term capital gains rates—while providing greater flexibility.

The Bottom Line

Using NUA is a tax strategy that can deliver major tax savings to employees who hold a lot of their company's stock in their qualified retirement plans. It separates the cost basis (taxed as ordinary income) from any price appreciation (taxed as long-term capital gains). 

If you are considering the NUA strategy, it would be prudent to first discuss this with a qualified tax professional or financial advisor.