Roll Those “NUA’s” Carefully From Your 401k into an IRA or You Might Forfeit a Dramatic Tax Benefit

Net Unrealized Appreciation, NUA’s for short, are individual stocks residing within a retirement plan that may have terrific tax benefits available. If an investor is not careful you can lose this tax benefit. NUA tax strategies are available one time, at the time of distribution, and if not used are lost!

NUA’s, most common in long time employed investor portfolio’s of publicly traded legacy companies, may also be found in any investor portfolio with a substantial slug of company stock. Under current tax law, there are possible substantial tax benefits if distributed correctly. 

While this concept can get confusing, let’s use an exaggerated example to make our point.

Example 1:  The Smart Way – 

An investor has a 401k plan with $500k worth of company stock and a basis of $10k. Using an NUA strategy, this investor may be able to roll his $500k worth of NUA stock into a taxable brokerage account by paying ordinary income tax on his $10k of basis, leaving future distributions taxed at current capital gains rates. Assuming this investor is in the 30% tax bracket, a $3k tax bill on the $10k basis would be due at distribution. Future distributions would possibly be at 15% under current tax law. This investor’s total tax bill is as follows: $490k x .15% = $73,5k plus $3k prior taxes for a total of $76.5 in taxes.

Example 2:  Not Smart Way –

This same investor (an exaggerated example..) rolls his 401k over into an IRA and then takes a full distribution. This time the tax bill, under the same tax law is $500k x 30% = $150k in taxes.

Under our first example the total tax bill was $76.5k and under the second, $150k, of course this is a no brainer.

Bottom Line

Life is never that easy, and there are many nuances we are not mentioning which must be reviewed. However, we hope you get the point, which is to recognize the potential of a lower tax strategy and dig deeper before you forfeit it!

Have a Great Day!




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