Net Unrealized Appreciation (NUA) and its planning details. It covers the factors to consider when deciding whether to elect NUA treatment for employer securities within a retirement plan. The video also explains the tax implications of retirement accounts versus taxable brokerage accounts and the specific requirements for NUA treatment, such as triggering events and the lump-sum distribution rule.
Transcript
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So, in this week’s episode, we want to continue the discussion around the NUA, which is net unrealized appreciation. This week’s episode will expand a little
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more on the planning details for NUA. The analysis on how much, if any, of the employer securities within a
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retirement plan to elect NUA treatment is a unique decision for each person, based on projected annual
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retirement income needs, projected future marginal tax rates, and also estate planning considerations. The tax deferral within a
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retirement account is a powerful accelerant for wealth accumulation, as both dividends and capital gains are not
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taxed when received each year, as they would be in a taxable brokerage account. However, the tax deferral benefit
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comes at a cost tradeoff. Almost every dollar distributed from a pre-tax retirement account will be taxed at
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ordinary income tax rates. These rates are almost always higher than those on dividends and capital gains. While within
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a taxable brokerage account, both dividends and capital gains generally receive favorable tax
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treatment, but they are nonetheless taxed when received, which can reduce overall returns due to the taxes owed on
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these. As mentioned in last week’s episode, distributions only qualify for NUA treatment if completed after the triggering event, which there are
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really four of them: separation from service, reaching retirement age of 59 and a half, death, or
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disability. In addition, shares of employer securities for the NUA must be moved in kind to a taxable brokerage
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account. You cannot sell the securities within the retirement plan, then move cash to a brokerage account and purchase
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the same shares at that point. This wouldn’t qualify for the NUA benefit. Another major point is
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that the retirement plan must be emptied within the calendar year as a lump-sum distribution. So, let’s say you are
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planning to retire in November or December of a future year. We strongly recommend you don’t initiate any
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distributions until the following January, and the reason for that is, if there is a delay in processing the transaction, you run the risk of the
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retirement plan not being fully liquidated before December 31st, which will negate the NUA treatment and can
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leave you with a large tax liability on the full amount of the distribution. So, until our next episode,
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keep searching for opportunities to enhance your wealth.