Source: Adobe Stock
When clients leave a job or retire, the usual advice you might give them regarding their 401(k) account is to roll it over to an IRA. This is generally a sound approach. However, when their 401(k) includes shares of their employer's stock, a tactic called net unrealized appreciation (NUA) might be a better approach for this stock.
What is NUA?
NUA is a technique contained in the tax code allowing company stock held inside of a 401(k) plan to be rolled into a taxable account instead of into an IRA account. The value of the stock is taxed, but it is taxed at its cost basis, not at the current market value of the stock. Any additional investments in the account, such as mutual funds and other investments, can still be rolled into an IRA account to preserve the tax-deferred nature of this money. Your clients can get the cost basis of their shares from the company.
If the stock is held for at least a year and then sold, the gains are treated as long-term capital gains and taxed at the preferential long-term capital gains rate. If the stock was rolled over into an IRA, the value of the shares would be taxed as ordinary income when withdrawn upon retirement. In some cases, using NUA can result in significant tax savings for your client.
Key Considerations
David Smith, CIMA® CFP® of Robinson Smith Wealth Advisors, LLC says, "NUA can make a lot of sense if the cost basis on the stock is very low compared to the current price."
