The Net Unrealized Appreciation (NUA) StrategyMost 401(k) Owners Don't Know About

The Problem with Company Stock in a 401(k)

If you've worked at a company for decades and accumulated company stock inside your 401(k), there's a strategy that can dramatically reduce the tax you owe when you take it out — and almost nobody uses it because almost nobody knows it exists. It's called Net Unrealized Appreciation, or NUA. Normally, every dollar you pull out of a traditional 401(k) is taxed as ordinary income. If you're in the 32% bracket and you pull out $500,000, you owe $160,000 to the IRS. It doesn't matter if that $500,000 is cash or company stock — it's all ordinary income.

What NUA Changes

NUA is the difference between what your company stock cost when it went into your 401(k) (the 'cost basis') and what it's worth today. Under IRS rules, if you take a 'lump-sum distribution' of your 401(k) and move the company stock in-kind to a taxable account (rather than rolling it to an IRA), you only pay ordinary income tax on the original cost basis — not the full current value. The gain above that basis? It gets taxed as long-term capital gains when you eventually sell — currently 0%, 15%, or 20% — dramatically lower than ordinary income rates for most people.

A Simple Example

You have $400,000 of company stock in your 401(k). The cost basis when it entered was $80,000. The NUA is $320,000. Under the standard IRA rollover approach, you'd eventually pay ordinary income rates on all $400,000. Under NUA, you pay ordinary income on $80,000 now, and long-term capital gains rates on $320,000 when you sell. For someone in the 32% ordinary income bracket and 15% capital gains bracket, that difference can be $54,000+ in savings.

Who Should Look at This?

NUA works best if: (1) you have a large amount of appreciated company stock in your 401(k), (2) you're separating from service or retiring, and (3) your company stock basis is low relative to today's value. This is a one-time election with specific IRS eligibility rules. If you have company stock in your 401(k) and you're approaching retirement, this deserves a dedicated conversation before you roll anything over.

Disclosure

Raymond James and its advisors do not offer tax or legal advice. Please consult the appropriate professional. Alternative investments involve specific risks that may be greater than those associated with traditional investments. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jim Maddux and not necessarily those of Raymond James.