NUA Strategy, Part 1: An Undiscovered Pearl in Your 401(k)

Net Unrealized Appreciation (NUA) is the difference in the price you had paid (cost basis) for your company stock and its fair market value today.¹

For some of you, the NUA of your employer stock may be like a shiny, valuable pearl sitting in your 401(k). Like an oyster, your 401(k) serves an important purpose. The oyster is a source of food, and your 401(k) is a source of income in retirement.

The pearl is an unexpected gem that the oyster produces—much like appreciated company stock in your 401(k) can be!

Let me explain using an example

You’re getting ready to retire and decide to review your 401(k). You notice your company’s stock is currently valued at $100 a share, so the 2,000 shares that you hold are now worth $200,000. You take a close look at your account statement and see that the cost basis (how much you paid for the stock) is $14,000, which is an average of $7 a share. Over your career, your company stock has appreciated by $186,000. Although you feel pretty good about that gain, you also experience a little regret because if you had purchased those shares outside of your 401(k), you would normally pay long-term preferred tax rates (0%–20%)² when you sell those shares. But when you sell the shares and distribute from your 401(k), you will most likely pay the much-higher ordinary income tax (10%–37%).³

Then you see the gleam of the pearl. The Net Unrealized Appreciation strategy allows you to pull the company stock out of your 401(k) and pay ordinary income tax on the basis of $14,000 and preferred capital gains tax on the additional $186,000 that’s been transferred to a taxable investment account.⁴ Not only can you save on taxes, but you will typically have more flexibility with the stock now that it’s owned in a taxable account. Some examples of flexibility you may have are: selling shares for living expenses, gifting them to family and/or donating them to a charity. There are many variables to consider when deciding if an NUA strategy is right for you, so please reach out to your CI Private Wealth Advisor to review your plan before making any decisions regarding this option.

What are the potential tax savings when using an NUA strategy?

The chart below exemplifies the potential taxes saved using an NUA strategy. In this example, we assume the taxpayer is in the 32% marginal tax bracket and 15% capital gains bracket. This simple view shows how the taxpayer distributes the 401(k) and sells all the stock on day one, and benefits from a tax savings of $31,260. That kind of tax savings is a real gem!

Please note that each taxpayer’s situation is different and needs to be analyzed before deciding to take advantage of using an NUA strategy. To help determine if your appreciated company stock may become a valuable pearl, please discuss any tax planning strategies with your CPA.