Retiring with Company Stock in Your Employer Retirement Plan? An NUA Could Help.
Owning company stock inside your employer retirement plan, e.g., 401(k), can be a great employee benefit. At retirement, assuming the tax-deferred value of your company stock has grown, you may want to consider a frequently underused strategy called Net Unrealized Appreciation (NUA). This strategy allows you to roll your company stock from your employer retirement plan into an individual brokerage account (after-tax account) rather than into an IRA.
The Tax Bite & Why this Matters
The NUA is the difference in value between the company stock’s average cost basis or the price that you paid and the current market value of the shares held in your employer retirement plan. Understanding the tax impact of NUA becomes increasingly important if your stock has appreciated significantly.
- If your retirement plan includes both company stock as well as other investments, such as mutual funds, you’ll need to know the company stock cost basis.
- The company stock can be transferred into an individual brokerage account. The cost basis will be taxed at your ordinary income tax rate in the year the transfer takes place. However, you will not pay tax on the stock’s appreciated value until you sell it. You will then pay the more favorable capital gains tax rate at that time.
- The remaining value of the retirement plan can be rolled into an IRA account. This is considered a tax free rollover until you begin withdrawing funds from the account. Withdrawals from an IRA are taxed at your ordinary income tax rate.
Planning for income during retirement can be a complicated process. Trying to create tax-efficient income – now and in the future – becomes even more challenging as tax laws evolve and change. Before doing anything, it’s important to contact your plan sponsor or your benefits department and ask about the NUA opportunity (you must meet certain IRS conditions and they may be able to help ensure you qualify).
Because NUA is a complex planning strategy and there are a number of considerations that need to be factored in, please talk with your advisor. Have a conversation; learn about your options, run scenarios, and consider the implications. This tax strategy could save thousands over the course of your retirement.
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Vector Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.