NUA, Little-Known Tax Break

If you are retiring from your employ or if you have to dig into your retirement account before retiring (provided you are able), you can save money on taxes with Net Unrealized Appreciation (NUA) when you have company stocks as part of your retirement plan.

• If you are retiring, the stipulation is you can not roll your 401k into a non-taxable IRA.
• If you are not retiring and are 59 ½ there is no penalty, but if you are under 55, there will be a 10% penalty.
• Normally you must pay regular income tax on what you withdraw. However, if stocks were part of the contribution from your company to your 401K, you can pay a combination of your regular income tax and a capital gains tax which has a lower tax rate. You will pay income tax on only the amount of the purchase price of the stocks at the time they were bought; the rest is taxed at the capital gains tax rate.
• If you withdraw $100,000 to meet a need before retirement or to transfer to an individual retirement account after retirement and are in an income tax bracket of 33%, you would pay $33,000. But, with the NUA, if that withdrawal is made up partly of stock given to you by your company which was valued at $10,000 at that time, you would only pay $333. The remaining $90,000 would be taxed at the capital gains tax rate of 15% or $13,500, a savings of the difference, $33,000 versus $13,833.

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