If you are a long-time listener you know that we like to go through the nuances of financial planning that may be valuable to you.
In this episode, Allison and I take a look at net unrealized appreciation (NUA). Listen in to learn what it is, who could benefit from it, and the benefits and pitfalls of using NUA. You won’t want to miss out on hearing one of our classic fictional case studies involving Freddie Krueger. Press play to hear if you could benefit from using NUA.
Outline of This Episode
[1:20] What is net unrealized appreciation?
[3:45] A case study
[8:40] The four triggering events
[11:15] Benefits of NUA
[15:44] The drawbacks
What is net unrealized appreciation?
Net Unrealized Appreciation (NUA) is a simple concept, but there can be complexity in the mechanics of applying the rule and in the compliance checklist. What this term refers to is the increase in value of the employer stock from the time it was acquired by a plan to the date of distribution to the plan participant.
You can use NUA when you are separating from your employer due to retirement or another qualified reason. It works when you can take a lump sum from your 401k plan and roll it over into an IRA. However, if that plan includes highly appreciated stock then there is a tax rule that allows you to withdraw the stock from the plan and pay regular income tax on what you paid for the stock. Then you can pay lower long-term capital gains rates on the appreciation.
NUA could save you money in taxes
NUA allows you to defer the tax on the net unrealized appreciation until you sell that stock position. When you do so you’ll only pay tax at your current capital gains rate. This could provide significant tax savings if you have highly appreciated employer stock in your 401K.
Oftentimes people tend to lean toward the direct rollover of the entire 401K, but if you have highly appreciated employer stock, you may want to reconsider. Listen in to learn how Freddie Krueger could use NUA to free up some assets and save money on taxes.
Things to keep in mind when using NUA
There are a few things you’ll need to keep in mind if you plan on using NUA to save on taxes. The first thing to consider is if you have highly appreciated company stock. This includes stock that was purchased long ago and is now valued at a much higher rate. You’ll also need to have a triggering event. This could be reaching age 59 ½, separating from service at your employer, a disability, or death. Another important aspect is that this event must occur in only one tax year.
It is extremely helpful to have a financial advisor walk you through the intricacies of using NUA. Listen in to discover if NUA could help you improve your financial flexibility.
Connect With Chad and Allison
Subscribe To This Podcast
Apple Podcasts <> Stitcher <> Google Play
Chad Smith
Chad Smith is a Certified Financial Planner™. He is an active member of NAPFA, the Financial Planning Association, and FPA’s NexGen. He has been quoted and appeared on WSJ.com, Bloomberg.com, Businessweek.com, Msn.com, Financial Planning Magazine, Triangle Business Journal, and Investment News.
Allison Berger
As an experienced Financial Advisor and partner, Allison builds custom financial solutions to enhance today and enrich tomorrow for our Wealth Management clients. Allison has a particular interest in working with clients in or on the cusp of retirement who want to delegate their portfolio management so they can enjoy life.