Understanding Net Unrealized Appreciation (NUA)

How does Net Unrealized Appreciation (NUA) work?

• Usually the pretax portion of what your client paid for the stock (cost basis) is taxable as ordinary income in the year it is distributed in kind to them. This portion may also be subject to a 10% penalty if they are under the age of 59½.
• Under the NUA rules, your client can elect to defer taxes on the NUA until the time they liquidate the stock. Regardless of how soon they sell the stock after they receive it in kind, the NUA should be taxable as long-term capital gains. NUA and any additional appreciation realized after the distribution in kind should not be subject to the 10% early withdrawal penalty, regardless of the client's age. The additional appreciation, however, should be taxable as short-term or long-term gains, depending on how long the client held the stock after it was distributed in kind from the plan.
• People approaching retirement often have sizable 401(k) plans and other employer-sponsored plans. Many of these accounts include company stock that has appreciated over the years. If you have clients in this situation, you may want to tell them about special tax advantages applied to any Net Unrealized Appreciation on the company stock (referred to as the NUA strategy) that may help them reduce taxes and avoid early withdrawal penalties on those assets. Of course, your clients should consider consulting a tax advisor to ensure that NUA is available to them and appropriate for their situation.
• When utilizing the NUA strategy, your clients must take a lump-sum distribution of all the assets¹ in their employer-sponsored retirement plan account. The employer stock is distributed in kind and is usually moved to a brokerage account. The rest of the assets may be rolled over.
• Nonemployer-stock assets in a client's employer-sponsored plan may represent an opportunity for a rollover to an IRA. To open a Fidelity Advisor Rollover IRA, download our Direct Rollover Form and a Fidelity Advisor IRA Application.
• Before discussing the NUA strategy with your clients, you may want to consider additional factors such as a client's tax bracket, their age when separated from service, and their overall retirement assets.
• Clients should understand the risks inherent in investing in company stock. Future depreciation may offset the tax benefits of the NUA strategy.

Who is eligible for NUA?

Your client must:

• Be eligible to take a lump-sum distribution¹ from their plan—usually due to separation from employment, disability, or attaining 59½ years of age.²
• Receive the distribution of the company stock directly from their workplace plan. The NUA rule cannot be used if they roll the stock over to an IRA and then liquidate it.
• Be able to pay income tax on the cost basis of the stock distributed in kind in the year in which it is taken.

Who benefits from the NUA strategy?

Clients might be interested in this strategy if they:

• Have separated from the service of an employer (or are otherwise eligible to take a lump-sum distribution of their account).
• Own highly appreciated employer stock in an employer-sponsored retirement plan.
• Expect to be in a high tax bracket when they sell the company stock for income.

How does the client benefit?

Using the NUA strategy:

• May help clients reduce their taxes on the income from the sale of employer stock.
• May reduce clients' future minimum required distributions (MRDs), since the employer stock is held outside an IRA.
• Offers the possibility of passing favorable tax treatment on to beneficiaries.