How to Make Net Unrealized Appreciation Work for You

 The financial planning profession is full of acronyms such as RMD, IRA, TSA and NUA.  One acronym making a comeback due to the increase in the US Equity market is “NUA”.  NUA stands for net unrealized appreciation and anyone with a 401k account containing stock might want to better understand it.  NUA comes into play when a person retires or otherwise leaves an employer sponsored 401k plan.  In many cases, 401k funds are rolled over to an IRA.  However, if you hold company stock in the 401k plan, you might be best served by rolling the company stock out separately. 

Before getting to an example, here are the gory details: The net unrealized appreciation in securities is the excess of the fair market value over the cost basis and may be excluded from the participant's income. Further, it is not subject to the 10% penalty tax even though the participant is under age 59-1/2, since, with limited exceptions; the 10% tax only applies to amounts included in income.  The cost basis is added to income and subject to the 10% penalty, if the participant is under 59.5 and the securities are not rolled over to an IRA.

Suppose Mary age 62 works for a large company that offers a 401k plan.  Over the years she has purchased $50,000 of XYZ company stock and it has appreciated over the years with a current value of $150,000.  Therefore, Mary has a basis of $50,000 and net unrealized appreciation of $100,000. 

If Mary rolls XYZ stock over to an IRA at retirement or termination, the full $150,000 will be taxed like the other funds at ordinary income tax rates when distributed.  However, if Mary rolls XYZ stock out separately the tax rules are different and potentially more favorable.  In the example above, if Mary rolls XYZ out she will pay ordinary income tax immediately on $50,000 but may obtain long term capital treatment on the $100,000 appreciation when the stock is sold; thus potentially saving several thousand dollars in income tax.

A NUA transaction is complex so care and professional guidance is encouraged.   

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material, is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.