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Are You Utilizing Net Unrealized Appreciation? If Not, You Probably Should Be

Are you getting as much from your company stock as may be available? If you have stock in a company plan, you should know about Net Unrealized Appreciation {NUA}. If you are considering rolling over your 401k and have highly appreciated company stock in your plan—stop! You may have a great opportunity to take the stock out at capital gains rates vs. ordinary income rates – more on this later.

What’s Net Unrealized Appreciation (“NUA”)?

Net unrealized appreciation (NUA) is the difference in value between the average cost basis of shares and their current market value. Such shares are often held in a tax-deferred account that has been established by your employer, often as a part of your compensation.

When you decide to sell such shares you may create a so-called taxable event, meaning you may owe taxes on any gain in the shares’ value. Pre-calculating gains or losses before actually selling the shares will help you forecast whether taxes will be due once they are sold. Reinvested dividends, capital gains and returns of capital as well as the average share purchase price, i.e., cost basis, go into making this determination. Consider that when an employer contributes company stock to an employee’s account, the value of that stock in the contribution year forms the basis. Any future appreciation becomes the NUA. The bottom line: is your potential gain enough to justify a tax bill or should you consider rolling over the shares into a qualified account?

More to Consider

Gains on employer stock shares that have been distributed according to NUA rules may be subject to the more favorable long-term capital gains rate. Depending on your taxable income and filing status, this is generally lower than ordinary income tax rates as well as short-term capital gains rates.

As taxes are typically due in the year of distribution, the first step in any NUA analysis is to determine whether the share price has appreciated enough to justify the taxes. Consequently if the stock has not appreciated enough then the smarter choice may be to consider “rolling over” the shares, thus postponing any tax liability while still maintaining full ownership of the shares. 

Understanding NUA can help build wealth but there are restrictions:

In-kind Distribution – This prohibits “cashing out” one’s position within the plan or rolling over the shares to an Individual Retirement Account (IRA). Either action makes one ineligible for favorable NUA treatment. Lump Sum Distribution – This means the entire account is liquidated by the end of the plan year to qualify for NUA treatment. The rule applies to both NUA and non-NUA assets in the account, each of which must be distributed by deadline or NUA treatment is lost.
Triggering Event –So-called triggering events include:

  • Turning age 59 ½ (Plan may not allow a distribution)
  • Disability (self-employed only}
  • Separation from Service (not for self-employed)
  • Death

While distributions are permitted after the above-mentioned triggering events, they do not need to take place immediately. However, once a triggering event occurs, the first distribution following the event is considered for NUA treatment.

Rolling Over Non-NUA Assets – While non-NUA assets must be distributed from the plan, they do not have to be taken as income. They can be rolled over to an IRA or other qualified plan.
Multiple Plans (Aggregation Rules) – If your company has more than one plan in which you participate you will need to exercise caution as this is too complicated a maneuver to be adequately addressed here.

Proper NUA treatment can clearly pay dividends. However, the IRS rarely forgives NUA miscalculations. If you think you may be eligible, talk to us before taking any action. Call our office at 845-627-8300 for your complimentary consultation. 

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