As a high-earning top performer in your company, managing your compensation wisely is essential for maximizing your benefits, especially when that comes in the form of stock options or other types of equity compensation.
Failing to plan ahead can turn something incredibly valuable into an unnecessary tax burden if you don’t account for the appreciation of those assets.
If you own shares of company stock and are looking for a tax-advantaged strategy for managing them, it may be beneficial to consider a Net Unrealized Appreciation (NUA) transfer.
This article will explain what an NUA is, why it’s advantageous, the general requirements, and how to execute an NUA transfer properly to realize the benefits.
A Net Unrealized Appreciation (NUA) transfer involves moving your company stock from your retirement account, such as a 401(k), to an individual brokerage account. Instead of selling the stock and rolling the proceeds into an IRA, you transfer the stock itself.
This strategy allows you to sell the stock immediately after the transfer at a favorable long-term capital gains tax rate.
NUA transfers offer several benefits that can support a number of financial goals, from tax minimization, to extra cash flow, and a better-balanced investment portfolio:
To qualify for NUA tax benefits, you must distribute your entire 401(k) (with exceptions, outlined below) in a single tax year following a qualifying event such as early retirement or separation of service. The cost-basis of the stock is taxed as ordinary income upon distribution, while the growth is taxed as long-term capital gains when sold.
Consider this example:
The greater the unrealized gain and the lower the basis, the more advantageous the strategy can be.
To qualify, you must distribute your 401(k) as a lump sum within a single tax year after a qualifying event. If you have taken partial rollovers in previous years, NUA treatment is not allowed.
Qualifying events are death, disability, separation from service, or reaching age 59.5.
Qualifying for this type of transfer is a bit nuanced, so let’s walk through some additional considerations:
After-tax contributions will typically be applied towards the distribution of company stock shares.
For example, if you made $50,000 in after-tax contributions and have $300,000 worth of company stock with a basis of $70,000, the $50,000 of after-tax contributions reduces the taxable distribution from $70,000 to $20,000.
Set up a brokerage account to receive the company stock. Your non-company stock assets, such as your 401(k), should be rolled over to traditional or Roth IRAs as appropriate.
Ensure the cost basis is correctly transferred to avoid tax issues. Notify your tax preparer of the NUA transfer, as the stock will be listed on your 1099 form with a purchase date equal to the distribution date from the 401(k).
You can sell the stock to supplement your cash or retain it for your heirs, who will benefit from capital gains tax rates.
NUA transfers are complex and require careful consideration. It's important to consult your wealth manager to ensure the process aligns with your financial goals and to navigate any potential complications.
If you are executing this type of financial strategy and don’t have a trusted wealth manager on your side, it may be time to consider partnering with Plancorp.
Our team specializes in complexities like this, and can assure that your equity compensation strategies will be guided appropriately to achieve the most beneficial tax treatment and support your overall financial goals.
Not sure if you need a wealth manager? Download our free worksheet for a personalized recommendation based on your specific situation.