10 NUA Q&As
By Andy Ives, CFP®, AIF®
Follow Us on Twitter: @theslottreport
1. What is the NUA (Net Unrealized Appreciation) tax break? It is the opportunity to pay tax at long-term capital gains rates on the appreciation of company stock held within a company plan vs. paying ordinary income rates on that growth.
2. Who is a potential candidate for NUA? Anyone with highly appreciated company stock in their workplace plan, like a 401(k).
3. Can it be any company stock? It must be the company stock of the company that sponsors the 401(k). The company stock can be held as individual shares within the plan or as a stock fund that is converted to shares upon distribution.
4. How do you define “highly appreciated”? “Highly appreciated” is subjective. There is no magic percentage dictating what level of growth makes for a good NUA opportunity. Every person is different, and every person will have an NUA “tipping point” where it makes sense.
5. Can anyone take advantage of the NUA tax break? No. A person must hit an NUA “trigger event,” of which there are only four: Reaching age 59½ (although the plan is not required to allow an in-service distribution at that age); Separation from service (not for the self-employed); Disability (only for the self-employed); and Death. To be eligible for NUA, one of these triggers must be met.
6. What actions will “activate” the NUA trigger? Any distribution from the plan, such as an RMD, will activate the trigger. A partial rollover could activate the trigger, as could an in-plan Roth conversion. If the trigger is activated, the NUA lump sum distribution transaction must be completed by the end of that same calendar year, or that specific NUA trigger opportunity will be lost.
7. Do you have to completely empty the 401(k) account? Yes, there must be a full lump sum distribution. A successful NUA transaction requires the entire 401(k) balance to be emptied in one calendar year. Typically, non-NUA assets get rolled to an IRA, and the NUA stock is transferred in-kind to a non-qualified brokerage account.
8. Will late additions to the plan disqualify the lump sum distributions? No, dividends or other late additions that trickle into the 401(k) account in the next year will not disqualify the lump sum payout.
9. Can an NUA transaction be done before age 59 ½? Yes, if another trigger is activated, like separation from service. The age-55 exception will allow some people under age 59 ½ to avoid the 10% penalty on the NUA transaction. If under age 55, the 10% penalty will only apply to the cost basis of the NUA stock (and any non-NUA stock assets that are not rolled over).
10. Is NUA an all-or-nothing deal? No. Partial NUA transactions are allowed. However, any company stock that is rolled over to an IRA will forever lose the NUA tax-break opportunity.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.