By Richard Archer
You have company stock. That’s great! But just like any other financial asset, how you use it makes all the difference. Between the different types of company stock, vesting schedules, and portfolio allocation, there are many financial planning considerations to be aware of.
On top of all that, we can’t forget about taxes. Whether it’s using a Section 83(b) election or watching your tax rates, there are a few taxation strategies you can use to maximize your employee stock options.
Here’s one more to add to your arsenal.
Net Unrealized Appreciation
Have you heard of net unrealized appreciation (NUA)? You most likely haven’t, but it can make a significant difference when it comes to how you are taxed on your 401(k) distributions.
Simply put, NUA is the difference between the price of the stock when you got it and what it’s worth today.
How It Works
You have a workplace retirement plan with a sizable amount of company stock. If you roll your 401(k) into an IRA, your stock appreciation will be taxed at ordinary income tax rates when you take a distribution. Those tax rates can be as high as 37%.
NUA to the rescue! This strategy allows company stock from a 401(k) to be split off from your other savings and rolled over to a taxable account so you can take advantage of capital gains taxes, which currently top out at 20%.
Do The Math
Want to see some numbers?
Let’s imagine you have company stock with a cost basis of $100,000. After many years, that stock is now worth $400,000. Your NUA is $300,000. If you go the traditional route of rolling that $400,000 to an IRA and your tax rate is 37%, you will owe a whopping $148,000.
But if you use the NUA strategy and move the shares to a taxable account, you would pay income tax on the cost basis in the year you made the rollover, coming out to $37,000. If you then sold the shares and paid the 20% capital gains rate, you would owe another $60,000 on the NUA amount of $300,000 for a total of $97,000. That’s a tax savings of $51,000!
Is NUA Right For You?
Are you interested in using the NUA strategy? If any of these given situations applies to you, you are eligible:
You are leaving or have left the employer you received your stock from.
You are 59½ and your plan allows in-service distributions from your retirement plan.
You have suffered a disability.
You are a family member of someone with company stock who has passed away.
Beyond eligibility requirements, you will want to run some numbers based on your unique financial circumstances. Look at how much your stock has appreciated, what your current income tax bracket is, and if you can afford to pay income taxes on the cost basis of your stocks up front.
We Can Help You Reduce Your Tax Bill
NUA, along with other tax minimization strategies, has many ins and outs, and its success will depend on your situation and executing the transfer and sale properly.
We are here to help you understand the net unrealized appreciation strategy and all the other aspects of financial planning for tech executives or those with company stock.