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Understanding Net Unrealized Appreciation (NUA)
NUA is the difference in value between the cost basis of company stock and its market value at the time it is distributed in kind from a plan as part of a lump-sum distribution.1
How does it 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 and may also be subject to a 10% penalty if they are under age 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.
- You may want to consider additional factors such as a client's tax bracket, age when separated from service, and overall retirement assets before discussing the NUA strategy with your clients.
- 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?
Your client must also:
- 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.
Clients might be interested in the NUA 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 do they benefit?
- 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.
- 1. If your client does not distribute the company stock as part of a lump-sum distribution, then only the NUA attributable to employer stock purchased with after-tax employee deferrals should be eligible for the special tax treatment.
- 2. In certain circumstances, distributions taken solely as a result of attainment of age 59½ are not considered lump-sum distributions.
- For tax purposes, your cost basis (plus or minus certain adjustments) is used to determine the gain or loss of a transaction. The information that Fidelity is required to report on your 1099-B may not reflect additional adjustments that you are required to make when filing your tax return.
- The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice.