Net Unrealized Appreciation (NUA) is a tax-advantage strategy that applies to certain employer sponsored retirement plans, such as a 401(k) or a pension plan. It refers to the difference between the cost basis of an employer stock and its current market value.
The idea behind NUU is to take advantage of the lower tax rate on long-term capital gains. Under NUA, the cost basis of the employer stock is taxed at ordinary income at the time of the distribution, but the appreciation value is taxed as long-term capital gains, which is generally a lower tax rate.
Here’s how you can take advantage of NUA:
- Wait until you’ve separated from service with the employer: You can only take advantage of NUA if you have separated from service with the employer, wither through retirement, layoff, resignation, or other events.
- Transfer the stock to a brokerage account: Once you’ve separated from service, you can transfer the employer stock to a brokerage account and sell it.
- Pay taxes on the cost basis: The cost basis of the employer stock will be taxed as ordinary income when it is distributed from the 401(k) plan.
- Enjoy the long-tern capital gains rate on the appreciation: The appreciation in value of the employer stock will be taxed as long-term capital gains when it is sold in the brokerage account.
It is important to consider that taking advantage of NUA may not be the best option for everyone, as it depends on your specific financial situation and goals. It’s also worth considering speaking with a Financial Advisor to discuss the pros and cons before making a decision.