K.E.M. Strategic Partners LLC | 35 Village Road, Suite 100 | Middleton MA 01949 | P. 978-560-3404  |  F. 978.560.1623

 
 

Caring  |   Independent   |   Practical
Financial Services

Retirement Read Time: 2 min

Net Unrealized Appreciation (NUA) Explained

If you have built up company securities within your employer-sponsored retirement plan, you may find yourself with a range of choices when the time comes to take a distribution. If those securities have experienced appreciation, it's worth considering the potential benefits of utilizing the net unrealized appreciation (NUA) tax treatment.

Remember, this article is for informational purposes only and is not a replacement for real-life advice. Make sure to consult your tax professional to get more detailed information on any company stocks you may own and how unrealized appreciation may be used.

What is the Net Unrealized Appreciation Rule?

Net unrealized appreciation is actually a pretty simple concept, but the execution can be difficult to understand. If you choose to invest in your company's stock and the stock increases in value over time, the difference between the original cost basis (the price at which the stock was purchased) and the current market value of the stock is the NUA.1

For example, if you were issued employer stock at $20 per share and it is now worth $50 per share, you would have an NUA of $30 per share ($50 - $20 = $30).1

To qualify for the tax treatment associated with NUA, the distribution must meet the criteria for a lump-sum distribution.1

  • Within one taxable year of the recipient;
  • Has to be in the person's account at the time of the transaction;
  • From a qualified pension, profit-sharing or stock-bonus plan, which becomes payable to the recipient
    • on account of the employee’s death;
    • after the employee reaches age 59½;
    • on account of the employee's separation from service, or;
    • after a self-employed individual has become disabled.

Downsides of NUA

The NUA strategy may not always be the best choice. Here are a few reasons why:

  1. Concentration risk: You may already have employer stock through other forms of equity compensation. Adding more to your portfolio may not be appropriate, despite tax considerations.
  2. Tax implications: Taxes should always be considered when making financial decisions, but they shouldn't be the only factor. Tax laws can change, so consider working with a tax professional who can keep you up to date with the new rules.2,3
  3. No step-up in basis on NUA portion at death: When certain assets are inherited, they receive a step-up in basis to the market value on the date of death. However, when NUA is inherited, it does not receive a step-up in basis.

1. Ameriprise.com, April 2023
2. Forbes.com, September 8, 2021
3. Kiplinger.com, April 26, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

 

Related Content

Extended Care: A Patchwork of Possibilities

Extended Care: A Patchwork of Possibilities

What is your plan for health care during retirement?

Saving for College

Saving for College

This calculator can help you estimate how much you should be saving for college.

Bi-Weekly Payments

Bi-Weekly Payments

This calculator estimates the savings from paying a mortgage bi-weekly instead of monthly.

 

Have A Question About This Topic?







Thank you! Oops!

Protection Against Uninsured Drivers

You’re hit by an uninsured driver. Now what? Are you protected against financial losses?

Making a Charitable Contribution

There are benefits and limitations when you decide to donate stock.

Your Emergency Fund: How Much Is Enough?

Having an emergency fund may help alleviate the stress and worry associated with a financial crisis.

View all articles

Disability Income

This calculator estimates your chances of becoming disabled and your potential need for disability insurance.

Paying Off a Credit Card

Enter various payment options and determine how long it may take to pay off a credit card.

Federal Income Tax

Use this calculator to estimate your income tax liability along with average and marginal tax rates.

View all calculators

The Power of Compound Interest

Learn how to harness the power of compound interest for your investments.

Where Is the Market Headed?

We all know the stock market can be unpredictable. We all want to know, “What’s next for the financial markets?”

The Cycle of Investing

Understanding the cycle of investing may help you avoid easy pitfalls.

View all videos