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

Global vs. International:  What’s the Difference?

Global vs. International: What’s the Difference?

International funds invest in non-U.S. markets, while global funds may invest in U.S. stocks alongside non-U.S. stocks.

Your Changing Definition of Risk in Retirement

Your Changing Definition of Risk in Retirement

A change in your mindset during retirement may drive changes to your portfolio.

Personal Finance Tips for Military Families

Personal Finance Tips for Military Families

Military families face unique challenges, making personal finance even more critical.

 

Have A Question About This Topic?







Thank you! Oops!

Will Power

Preparing for the eventual distribution of your assets may not sound enticing. But a will puts the power in your hands.

The Average American Budget

Learn about the average American budget in this fun and interactive piece.

Lots of Variables with Fixed-Rate Mortgages

When selecting a fixed-rate mortgage, a borrower has to determine how many years to finance the loan.

View all articles

What Is the Dividend Yield?

This calculator helps determine your pre-tax and after-tax dividend yield on a particular stock.

Paying Off a Credit Card

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

Potential Income from an IRA

Estimate your monthly and annual income from various IRA types.

View all calculators

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

It Was the Best of Times, It Was the Worst of Times

All about how missing the best market days (or the worst!) might affect your portfolio.

The Other Sure Thing

Though we don’t like to think about it, all of us will make an exit sometime. Are you prepared?

Questions to Consider When Buying a Vacation Home

Doing your research is key before buying a vacation home.

View all videos