NUA Tax Strategy Explained: Company Stock & 401(k)s
If you have company stock in your 401(k), there is a potential tax strategy known as “NUA”, or Net Unrealized Appreciation, that can provide favorable tax treatment when applicable.
Normally, when you take money out of a traditional 401(k), every dollar is taxed at your ordinary income tax rate. However, certain exceptions may apply, including rollovers, after-tax contributions, and special rules for employer stock.
For qualifying employer stock held in a 401(k), NUA treatment may allow the appreciation portion to be taxed at long-term capital gains rates when sold. This can be beneficial in some circumstances, but the outcome depends on factors such as cost basis, appreciation, tax rates, timing, and concentration risk. (Visual: Same visuals from before stay on screen, then a gold company stock coin comes out of 401k box, goes to the right, and gets stamped with green “Capital Gains Tax”)
When people leave a job without knowing about NUA, they might roll their 401(k) into an IRA without considering the tax implication.
If that 401(k) includes company stock, rolling it over could cause you lose the ability to use NUA altogether.
Why? Because NUA generally applies only when employer stock is distributed directly out of the retirement plan into a taxable account.
Whether NUA makes sense depends on your situation, but timing and sequence matter.
Before making any decisions with company stock, or 401k rollovers, it’s worth understanding your options.
If you want help evaluating what makes sense for your situation, reach out to Blue Chip Partners.
