Using Net Unrealized Appreciation as a Retirement Tax Planning Strategy

There may be a significant tax opportunity for your clients who have company stock in their 401(k) plans that have highly appreciated over time. Net Unrealized Appreciation (NUA) allows clients to roll dollars in company stock into a brokerage account. They'll pay ordinary income tax only on the basis in the company's stock, and they will be able to pay capital gains tax, which is most often at a lower rate on the appreciation when they sell it in the brokerage account. However, it's essential to understand all of NUA's intricacies to help your clients take advantage of this tax strategy.

Considerations 

You must roll company stock in kind to the brokerage account. You can't sell the stock in the 401(k) and then move the money into a brokerage account. You'll lose that NUA tax treatment.

Additionally, it would help to plan around the client's other income. You don't want to use this strategy while the client is still working since they will pay tax on the basis at the highest marginal rate, which will be stacked on top of the earned income.

Strategy for Taking Advantage of Net Unrealized Appreciation

The first step in the NUA process is paying tax on the basis of the company stock. This should be done when the client retires or the year after, depending on their earned income. You don't want to recognize the capital gains in the same year that you recognize the basis.

For middle-income clients, if you can recognize the basis in one year and then in the next year recognize some portion of the capital gains, you might be able to get some of those capital gains out at a zero or a 15 percent rate without having the additional net investment income tax. Be mindful of how much capital gains you recognize each year.  

Stacking NUA with a Social Security Strategy

Pairing a Social Security strategy with Net Unrealized Appreciation can be a valuable technique for your clients since it spreads the tax over a couple of years. Suppose you're implementing a Social Security strategy. In that case, you're often delaying the high-wage earner's benefit in the household for as long as possible (until age 70), which clears space to do a NUA transaction. You generally don't want to make Social Security taxable when it otherwise wouldn't have been. Plus, there are other benefits to crafting a smart Social Security strategy.

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