Q. What is NUA strategy?
A. NUA strategy refers to a special case in 401k rollover to IRA - if someone holds employer stock in his or her 401k account and that stock may present an opportunity to use the Net Unrealized Appreciation (NUA) calculation (the difference between the stock's current market value and the value when it was allocated to the account) to save on tax.
For example
Aretiree at age 65 with a $500,000 lump sum distribution that includes $200,000 (current value) of employer stock. The stock was worth $75,000 when it was allocated to my account. If she rolls the entire amount into an IRA, all future distributions will be taxed at the applicable ordinary income rate.
In an NUA strategy, she would roll the $300,000 to an IRA but take the employer shares as a distribution. The $75,000 will be taxed as ordinary income, but the remaining $125,000 will be taxed at long-term capital gains rates when she sells. The rates-differential could result in substantial tax savings so it makes sense to consider NUA treatment when it’s available before rolling over the entire account.
NUA treatment is available only as part of a lump sum distribution paid within one taxable year and rolling over the stock to an IRA eliminates the NUA opportunity.
A. NUA strategy refers to a special case in 401k rollover to IRA - if someone holds employer stock in his or her 401k account and that stock may present an opportunity to use the Net Unrealized Appreciation (NUA) calculation (the difference between the stock's current market value and the value when it was allocated to the account) to save on tax.
For example
Aretiree at age 65 with a $500,000 lump sum distribution that includes $200,000 (current value) of employer stock. The stock was worth $75,000 when it was allocated to my account. If she rolls the entire amount into an IRA, all future distributions will be taxed at the applicable ordinary income rate.
In an NUA strategy, she would roll the $300,000 to an IRA but take the employer shares as a distribution. The $75,000 will be taxed as ordinary income, but the remaining $125,000 will be taxed at long-term capital gains rates when she sells. The rates-differential could result in substantial tax savings so it makes sense to consider NUA treatment when it’s available before rolling over the entire account.
NUA treatment is available only as part of a lump sum distribution paid within one taxable year and rolling over the stock to an IRA eliminates the NUA opportunity.
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