If you hold company stock in your employer-sponsored retirement account, you may have an opportunity to reduce your future tax burden. The net unrealized appreciation (NUA) strategy could be worth considering as you plan for retirement.
When you use this sophisticated strategy, employer-provided stock in your retirement account is given a more favorable tax treatment. Here’s a closer look at how it works.
Ordinarily, when you take a distribution from your 401(k) or other employer-sponsored retirement account, you must pay income tax on the amount you withdraw. If you have employer stock in your account, net unrealized appreciation (NUA) is a strategy that may save you a significant amount in taxes.
Here’s a summary of how the NUA rule works:
Timing is critical if you want to maximize the tax advantages of net unrealized appreciation. There are two key factors to consider:
Depending on your total cost basis (the total original cost of the stock), the income tax you owe could be significant. Taking the distribution in a year when you’re in a lower tax bracket could save you thousands in taxes.
Before committing to the net unrealized appreciation strategy, it’s also worth looking at how much your company stock has appreciated. Generally, the NUA strategy is most advantageous when the stock has appreciated significantly, and many would rather pay long-term capital gains taxes than income tax on that appreciation.
The net unrealized appreciation strategy only applies in certain situations. To use it, you must meet the following qualifications:
The net unrealized appreciation strategy has many advantages, but it comes with potential pitfalls as well:
You may only take advantage of the NUA tax break if your company stock is distributed directly into a brokerage account. If you roll your stock into an IRA first, you’ll permanently lose the opportunity.
When a large portion of your portfolio is made up of employer stock, your portfolio may be at risk if your employer’s stock plummets.
To qualify for net unrealized appreciation, you must completely empty all your qualified employer accounts within the same tax year.
Depending on your circumstances, NUA might save you money, or it might not. For example, depending on the total cost basis of your employer stock and your tax bracket at the time of distribution, the total income tax you owe might cancel out the savings that come with capital gains taxes.
It’s also important to remember that your company stock is just part of your portfolio. It’s generally best to make the decision to use (or not use) the net unrealized appreciation strategy in the context of the retirement planning process as a whole.
When you’re creating a plan for retirement, net unrealized appreciation is just one concern of many. Navigating all of your options can be overwhelming, but the team at Wealth Advocate Group is here to help you build a custom-tailored plan for your future. If you have questions or you’re ready to take the first step, contact us.
Call 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
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This information is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.
