Understanding Net Unrealized Appreciation (NUA)

Appreciating Stock

This article provides a high-level overview of Net Unrealized Appreciation (NUA) and its potential benefits. For a more in-depth analysis, I recommend reviewing Michael Kitces's comprehensive article on the topic.

What is NUA?

NUA is a potentially valuable tax planning opportunity that arises when you hold individual company stock within your 401(k) plan. When you contribute to your 401(k) and purchase company stock, the initial amount you invest is known as your cost basis. Any increase in the value of that stock above your cost basis is considered Net Unrealized Appreciation.

For example, imagine you invested $25,000 in Apple stock through your 401(k) in the 1990s. If that investment is now worth $44 million, your cost basis would be $25,000, and the remaining $43,975,000 would be your NUA.

How Does NUA Provide a Tax Advantage?

Typically, distributions from a 401(k) plan are taxed as ordinary income. However, if your 401(k) plan allows for it, you may be able to elect to have the appreciated portion of your company stock (the NUA) taxed at the more favorable long-term capital gains rates. This can result in significant tax savings for many taxpayers. The cost basis portion of the distribution would still be subject to ordinary income tax.

Triggering Events and Professional Guidance

To take advantage of NUA, a triggering event is generally required, such as retirement. It's crucial to understand that plan rules can vary significantly among employers. Therefore, you should work closely with your plan administrator to determine the specific requirements and options available within your 401(k).

Given the complexities of NUA, it is highly recommended that you consult with a tax professional who has experience with NUA opportunities and a financial advisor who can help you integrate NUA into your overall financial plan.

For Further Reading

For a detailed exploration of NUA, including scenarios where it might not be the best option, we recommend Michael Kitces's article: "Why the Net Unrealized Appreciation (NUA) Rules Aren't Always A Great Deal" on his Nerd's Eye View blog.

Contact Us for Comprehensive Tax Planning

For personalized tax planning advice, please contact Ron Taraborrelli:

• Phone: 856-562-8800

• Schedule a free consultation: Schedule an appointment 

Investment advice is offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities.

The information provided in this material is for informational purposes only and is not intended as tax or legal advice. Synergy Wealth Management does not provide tax or legal advice. Please consult with qualified legal or tax professionals for specific information regarding your individual situation.