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Net Unrealized Appreciation Explained

Net Unrealized Appreciation Explained

July 19, 2023

If you have built up company securities within your employer-sponsored retirement plan, you may find yourself with a range of choices when the time comes to take a distribution. If those securities have experienced appreciation, it's worth considering the potential benefits of utilizing the net unrealized appreciation (NUA) tax treatment.

Remember, this blog is for informational purposes only and is not a replacement for real-life advice. Make sure to consult with our team to get more detailed information on any company stocks you may own and how unrealized appreciation may be used.

What is the Net Unrealized Appreciation Rule?

Net unrealized appreciation is actually a pretty simple concept, but the execution can be difficult to understand. If you choose to invest in your company's stock and the stock increases in value over time, the difference between the original cost basis (the price at which the stock was purchased) and the current market value of the stock is the NUA.1

For example, if you were issued employer stock at $20 per share and it is now worth $50 per share, you would have an NUA of $30 per share ($50 - $20 = $30).1

To qualify for the tax treatment associated with NUA, the distribution must meet the criteria for a lump-sum distribution.1

  • Within one taxable year of the recipient.
  • Has to be in the person's account at the time of the transaction.
  • From a qualified pension, profit-sharing or stock-bonus plan, which becomes payable to the recipient.
    • On account of the employee’s death.
    • After the employee reaches age 59½.
    • On account of the employee's separation from service, or after a self-employed individual has become disabled.

What If NUA Isn’t Right for Me?

The NUA strategy may not always be the best choice and it’s wise to talk with our team before deciding if this strategy is right for you. Here are a few reasons why:

  1. Concentration risk: You may already have employer stock through other forms of equity compensation. Adding more to your portfolio may not be appropriate, despite tax considerations.
  2. Tax implications: Taxes should always be considered when making financial decisions, but they shouldn't be the only factor. Tax laws can change, so consider working with a tax professional who can keep you up to date with the new rules.2,3
  3. No step-up in basis on NUA portion at death: When certain assets are inherited, they receive a step-up in basis to the market value on the date of death. However, when NUA is inherited, it does not receive a step-up in basis.

Net Unrealized Appreciation is a powerful tax strategy that can unlock hidden wealth in your employer-sponsored retirement plan. By thoughtfully considering this option and seeking professional advice, you can save on taxes, enhance your financial flexibility in retirement, and secure a more prosperous future.

As with any financial strategy, it's essential to do your due diligence, understand the tax implications thoroughly, and make an informed decision that aligns with your long-term financial goals. NUA could be a game-changer for some individuals, but it's not a one-size-fits-all solution.

1., April 2023
2., September 8, 2021
3., April 26, 2022