NUA Strategy: How Retirees Cut Taxes on $500K Company Stock in 401(k)
The NUA strategy allows retirees to transfer company stock from a 401(k) to a taxable brokerage account, lowering taxes on capital gains. Example: A 62-year-old Apple executive has $500,000 of Apple stock in her 401(k) with a cost basis of $80,000. Rolling the entire balance to an IRA could cost her tens of thousands of dollars.
Key Numbers
According to a report by 24/7 Wall St., the NUA (Net Unrealized Appreciation) strategy is a tax planning tool used by retiring executives to reduce taxes on company stock held in 401(k) accounts.
How the NUA Strategy Works
Upon retirement, an employee can transfer company stock from a 401(k) to a taxable brokerage account instead of rolling it into an IRA. Ordinary income tax is paid only on the cost basis of the stock, while the unrealized appreciation (NUA) is taxed at the lower long-term capital gains rate when sold.
Illustrative Example
A 62-year-old Apple (AAPL) executive has $500,000 of Apple stock in her 401(k) with a cost basis of $80,000. If she rolls the entire balance into an IRA, she will pay ordinary income tax on the full amount upon withdrawal. With NUA, she pays income tax only on $80,000 and capital gains tax on the remaining $420,000, saving tens of thousands of dollars.
Requirements for NUA
- A qualifying event (e.g., retirement, separation from service) must occur.
- The stock must be distributed from the plan in a lump sum within one year.
- The plan must allow in-kind distributions.
What This Means for Investors
The NUA strategy can be beneficial for investors with a large concentration of company stock in their 401(k) who are planning to retire. However, it requires careful planning and may not suit everyone. Consulting a tax advisor is recommended.
Frequently Asked Questions
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