Hi Friends,

Do you hold company stock inside of your 401k? If so, there is an important tax rule that you should know about that may save you significant future income tax called net unrealized appreciation or NUA.

NUA allows you to transfer the company stock held inside of your 401k plan to a brokerage account instead of rolling it over to an IRA.

Please let us show you an example of how this can be beneficial.

Mary retires from Apple with a $3 Million 401k that has $1M in Apple stock inside of it. She has been purchasing Apple stock inside of her plan for many years and the value has gone up significantly. Her cost basis, which is how much she paid for the shares, is about $50,000 and she now has a $950,000 gain.

She can rollover her Apple stock to an IRA with the rest of her 401k or she can transfer that stock directly to a brokerage account as part of NUA.

Mary is in the 35% tax bracket- let’s compare her choice side by side.

 

If she rolls over her Apple stock with the rest of her 401k to an IRA, she or her beneficiaries will eventually pay ordinary income tax on the full value of the stock which is currently $1M.

If she chooses NUA instead, she pays ordinary income tax on the cost basis of $50,000 and then long-term capital gains tax on the $950,000 gain in the year she sells the stock.

Mary will likely save more than $140,000 in lifetime tax. She will also shrink her required minimum distributions and create a much larger account outside of her IRA. This may be helpful for future tax planning or Roth conversions.

NUA can be very complicated, and it is important that it is done perfectly. The tax savings however can be substantial. It is critical to work with an experienced professional, like us at Presilium to ensure that the NUA is correctly completed.

If you have a large amount of company stock inside of your 401k, this may be an opportunity to save a huge amount of tax and add a lot of flexibility to your financial plan.

Please reach out to us today and we are happy to discuss your options and prepare a side-by-side comparison like the one we just looked at together.

Thank you and we look forward to talking with you next Friday. 

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