Net Unrealized Appreciation

Many of our oil, gas and defense retirees are faced with a decision regarding large company stock positions in their savings plans. One of the options available to employees is net unrealized appreciation(NUA). When utilizing NUA, shares of company stock are removed from a retirement plan and taxed at their original cost basis instead of their current market value. The shares can then be held in a brokerage account until they are sold. At the time of sale the difference between the stock’s cost basis and its current market value will be taxed at preferential capital gains tax rates instead of ordinary income.

When determining whether an NUA distribution makes sense for you it is important to consider:

1. 1. 1. 1. Have you made after tax contributions to your company retirement plan?
            • After tax contributions to a retirement plan can typically be used to lower your taxable basis in an NUA distribution. Using this strategy can be especially beneficial when shares are highly appreciated or taxable contributions are sizable.
         2. What is your marginal tax rate at the time of plan distribution?
            • Taking a taxable NUA distribution at a high marginal rate reduces the value of the strategy. This consideration is especially important if you received a nonqualified pension distribution in the year of savings plan termination.
         3. Do you plan to maintain your position in company stock?
            • Diversifying away from a consolidated position may reduce your portfolio’s volatility in retirement. Diversification using rollover or pre-tax shares will likely reduce your tax obligation when compared to selling NUA shares for the purpose of diversification.
         4. Will your tax rate decline significantly in retirement?
            • Although long-term capital gains rates are lower than income tax rates the difference in taxes due may be negligible if your retirement income is low. Conversely, large tax deferred account balances could lead to high retirement tax rates especially when required minimum distributions begin. An NUA distribution could reduce this future tax obligation.
         5. Will you be subject to the net investment income tax?
            • High earners may be subject to tax on appreciation beyond the NUA amount at the time of distribution.

The following example is a simplified version of a savings plan distribution where NUA could be utilized:

Assume you have $100,000 of company stock in your savings plan with a cost basis of $20,000.

This basic example illustrates that highly appreciated stock positions can benefit from NUA tax treatment. At Baird Retirement Management, we've worked closely with thousands of retirees to help them understand not only how NUA works but how their retirement benefits are best optimized. Give us a call today.

Robert W. Baird & Co. Incorporated does not offer tax or legal advice, but our Financial Advisors regularly work with clients' attorneys and tax professionals to help ensure that all phases of wealth management are addressed.