What We Can Do For You
Analyze impact of taking NUA on with employer stock
Model the taxable impact of taking NUA
Assist with timing and execution of NUA when transitioning from full-time work
What is NUA?
Do you hold company stock in your employer-sponsored retirement plan? If so, you may want to consider what is called a “net unrealized appreciation” (NUA) strategy. With an NUA strategy, the IRS allows you to recognize long-term gains in employer stock at the long-term capital gains rate as opposed to the ordinary income tax rate, with your cost basis on the stock taxed at ordinary income tax rates. Without an NUA strategy, your company stock would be taxed in its entirety at ordinary income tax rates, which are typically higher for those who qualify to hold company stock in their employer retirement accounts.
Cost Basis Of Your Shares
When your employer grants you shares of their company stock into your retirement plan, for NUA purposes the cost of the shares is considered income paid to you but not taxed yet. This original granting price gives the basis for future taxation, so it is known as your "cost basis".
When you use NUA to transition these shares out of your retirement account, the cost basis is taxed as ordinary income. This is because the IRS views the shares given as company stock in lieu of regular pay.
Unrealized Appreciation On Your Shares
The next logical question is how does the IRS treat the change in value from the original grant price? In many situations, you might have held the company shares for years or decades before leaving your company. This can sometimes mean the current price for your company stock significantly exceeds the cost you received the shares at originally.
Because the cost basis of the shares is taxed at ordinary income rates, the IRS has ruled that this increase over your grant price is in essence an investment gain. So this can be taxed as a capital gain, which can potentially be significantly lower than ordinary income rates.
The term "net unrealized appreciation" refers to this gain over your grant price that has not yet been realized. NUA is an valuable tool for the senior executive, so reach out to us and begin a conversation to see if this strategy is right for you.
Considerations And Limitations
NUA is a powerful tool for you as you transition to from working for your employer. However, it does have it's limitations. For example, in order to qualify for NUA, you are required to withdraw all of your assets from the plan in the same calendar year. Other considerations include what to do about shares which may have a loss, instead of a gain. For more information, reach out to us and we can help guide you through this process.