Net Unrealized Appreciation (NUA): Huge Tax Savings on Company Stock
The NUA strategy can save thousands in taxes on company stock in your 401(k). Learn if you qualify and how it works.
Key Takeaways
- 1NUA allows capital gains treatment on appreciated company stock
- 2Only applies to employer stock in qualified plans (401k, ESOP)
- 3Must take lump-sum distribution in one tax year
- 4Cost basis taxed as ordinary income; appreciation taxed as capital gains
- 5Must have a triggering event (separation, age 59½, death, disability)
- 6Compare NUA to rolling all to IRA - not always better
- 7Long-term capital gains rate (0-20%) vs ordinary income (up to 37%)
What Is Net Unrealized Appreciation?
NUA is a tax strategy that allows you to pay long-term capital gains tax (instead of ordinary income tax) on the appreciation of employer stock in your 401(k) or other qualified plan.
- **The opportunity**: Pay 0-20% capital gains instead of up to 37% ordinary income
- **Applies to**: Employer stock in 401(k), ESOP, profit-sharing plans
- **The "net"**: The difference between cost basis and current value
- **Only on stock**: Not for other 401(k) investments
- **Lump sum required**: Must distribute entire account in one tax year
The Opportunity
Company stock worth $500,000 with $50,000 cost basis has $450,000 NUA. Without NUA: $450,000 taxed at up to 37% = $166,500 tax. With NUA: 20% = $90,000 tax. Savings: $76,500.
NUA Requirements
You must meet specific requirements to use the NUA strategy.
- **Employer stock**: Must be company stock from your qualified plan
- **Triggering event**: Separation from service, age 59½, death, or disability
- **Lump-sum distribution**: Entire plan balance in one tax year
- **Stock in-kind**: Stock must be distributed to taxable brokerage (not sold in plan)
- **Other assets**: Non-stock assets can roll to IRA
Lump-Sum Rule
You must distribute your ENTIRE plan balance (all accounts with that employer) within one tax year. Partial distributions disqualify NUA.
How NUA Tax Treatment Works
NUA splits the taxation of your company stock into two parts.
- Cost basis = what was paid for the stock in the plan
- NUA = current value minus cost basis
- You can hold the stock and defer NUA tax until you sell
- Any gains AFTER distribution get normal capital gains treatment
| Component | Tax Treatment | When Taxed |
|---|---|---|
| Cost basis | Ordinary income | Year of distribution |
| NUA (appreciation) | Long-term capital gains | When you sell stock |
| Post-distribution gains | Short or long-term gains | When you sell stock |
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NUA Strategy Example
See how NUA can save significant taxes.
Detailed Example
John has $200,000 in company stock (cost basis $30,000) and $300,000 in other 401(k) assets. **With NUA:** - Take stock in-kind to brokerage - Cost basis $30,000: taxed as ordinary income (~$7,200 at 24%) - Roll $300,000 to IRA (no immediate tax) - NUA of $170,000: taxed at 15% LTCG when sold = $25,500 - Total eventual tax: ~$32,700 **Without NUA (roll all to IRA):** - Future withdrawal of $200,000 at 24% = $48,000 tax - Savings with NUA: ~$15,300
When NUA Makes Sense
NUA isn't always the best choice. Consider these factors.
- **Large appreciation**: NUA is most valuable when stock has grown significantly
- **Low cost basis**: The lower your basis, the more NUA you have
- **Your tax bracket**: Compare ordinary income rate to capital gains rate
- **Time horizon**: Can you hold the stock long enough to benefit?
- **Concentration risk**: Holding lots of one stock is risky
- **State taxes**: Some states don't have capital gains preference
| Scenario | NUA Likely Better? |
|---|---|
| Stock appreciated significantly | ✅ Yes |
| High income tax bracket | ✅ Yes |
| Low cost basis | ✅ Yes |
| Little appreciation | ❌ Probably not |
| Need to diversify immediately | ❌ Probably not |
| Low income tax bracket | ❌ Maybe not |
Diversifying After NUA
After using NUA, you may have concentrated stock exposure. Consider diversifying into other assets.
- NUA stock can be sold and proceeds invested elsewhere
- Capital gains tax due when you sell
- Non-stock assets rolled to IRA can go to Gold IRA
- Gold provides diversification from single-stock risk
- Consider splitting: some NUA stock, some Gold IRA
- Augusta Precious Metals helps with partial IRA rollovers
Frequently Asked Questions
1Can I use NUA with any stock in my 401(k)?
No, only employer stock (your company's stock) qualifies. Index funds, mutual funds, and other companies' stock don't qualify for NUA.
2Do I have to sell the stock immediately?
No. After distributing stock to a taxable account, you can hold it indefinitely. NUA tax is due when you sell. Additional appreciation gets capital gains treatment based on your holding period.
3What if I have multiple 401(k)s with the same employer?
All accounts with that employer must be distributed in the same tax year for NUA to apply. You can't cherry-pick.
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