11 NUA Don'ts
By Beverly DeVeny, Chief IRA Analyst
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As with most IRA/tax strategies, the net unrealized appreciation (NUA) strategy comes with a few “don’ts.” Any one of these could mean a loss of your ability to take advantage of the NUA tax benefit. Go here for our overview of the NUA strategy.
- Don’t forget to consider NUA early when there is highly appreciated stock in an employer plan.
- Don’t sell the stock too soon in the employer plan. Once it is sold you lose, the original basis amount. Unless you can purchase the stock at a lower basis amount, you have lost the NUA opportunity.
- Don’t roll over the employer stock to an IRA. The rollover is an irrevocable decision and you cannot use NUA on stock that is in an IRA.
- Don’t take distributions from the employer plan in years before the year you want to do the NUA. Your distribution of the stock in a subsequent year will not qualify as a lump sum distribution.
- Don’t forget that you can do NUA with only some of the stock in the employer plan. You do not have to use NUA with all the stock.
- Don’t forget to make sure that all amounts are distributed from the employer plan by year end. The year-end balance in the plan should be zero.
- Don’t forget about your triggering events. If you miss one triggering event, a new triggering event gives you a new opportunity to use NUA.
- Don’t let the 10% early distribution penalty get in the way. If the appreciation in the stock is high enough, it could be worthwhile to pay the penalty.
- Don’t forget to let your broker know that the basis amount in the non-IRA account is the same as the basis amount in the employer plan. In other words, your basis amount is the amount on which you pay income tax.
- Don’t forget to let your tax preparer know that you are using the NUA strategy. After all the work you have done, you do not want to end up paying income tax on the entire distribution!
- Don’t forget to let your beneficiaries know about your NUA. If they inherit the NUA, they also inherit the long-term capital gains tax due on the NUA. There is no step-up in basis for NUA.
Don’t let all of these possible problems worry you. NUA is a great planning tool for your retirement. Working with a knowledgeable advisor can help ensure that all goes smoothly.
Our team of experts breaks down this strategy in more detail in this month's IRA Focus (was posted on June 27, 2016). You can sign up for IRA Focus today - and get the first month free!
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