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Our episode today is focused on a little-known tax rule that may provide huge advantages if your retirement plan
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includes company stock as an investment option. I’m referring to what is known as net unrealized depreciation, or NUA.
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NUA is defined as the increase in value of employer stock that is held in a qualified retirement plan. The types of retirement plans that can include
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company stock are 401(k)s, profit-sharing plans, stock bonus, and ESOP plans. NUA is calculated by taking the cost basis
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of the employer stock in the plan and subtracting the amount from the stock’s fair market value at the time of distribution. As an example, let’s say you
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purchase company stock for $100 within your retirement plan at the beginning of the year, and it is now worth $120. Your
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current NUA is $20, which is simply the difference between the current value of $120 and the purchase price of $100,
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which is otherwise known as the cost basis. The NUA is calculated at the time the employer stock is distributed from the plan as part of a lump-sum
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distribution. A lump-sum distribution is a payment from a qualified retirement plan due to an employee’s death, payment at age
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59 and a half, separation from service, or disability. NUA applies to employer stock that is actually distributed. Rolling
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over some of the employer stock into an IRA or other plan does not defeat the NUA treatment for the shares that are
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distributed. Rolling over non-NUA assets into an IRA or other plan is quite common to avoid current year income
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recognition on the balance of the lump-sum distribution. There are many aspects of the NUA rules that require an advisor
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with proficiency in analyzing your unique situation to keep you from experiencing severe tax implications if
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the NUA is done incorrectly. In future episodes, we will dive deeper into the details of the NUA, including a strategy that can
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eliminate any taxation on the cost basis of the NUA bond distribution. Until then, keep searching for opportunities to
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enhance your wealth.
