Definition
Net Unrealized Appreciation is a tax treatment for employees who hold appreciated company stock inside an employer retirement plan such as a 401(k).
How It Works
Distributions from a pre-tax 401(k) are normally taxed as ordinary income. The NUA strategy instead lets the employee, in a qualifying lump-sum distribution, pay ordinary income tax only on the stock's original cost basis while moving the shares to a taxable account. The appreciation is later taxed at long-term capital gains rates when the shares are sold.
Example
An employee with company stock worth $500,000 but an original basis of $100,000 uses NUA to pay ordinary tax on the $100,000 basis, then pays the lower capital gains rate on the $400,000 of appreciation when selling.
When It Works Best
It works best when the gap between ordinary income rates and capital gains rates is large and the employee holds highly appreciated employer stock.
Who It Applies To
Employees with appreciated company stock in an employer plan who experience a triggering event such as separation or reaching 59½.
Watch-Outs
It requires a lump-sum distribution of the entire plan balance within one tax year, with the shares moved in kind. Mistiming the distribution forfeits the benefit, so the sequence matters.
