Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018 occurs when an individual has invested in company stock within a retirement plan, such as a 401(k). NUA also refers to as a lump-sum distribution involving company stock. The NUA rules are different for 2018 because the tax rates changed.

Why is it Important?

An eligible taxpayer can save a significant amount of taxes by distributing appreciated stock to a taxable account.

Who is Eligible?

A person who separates from service by way of disability, or retirement if older than 59.5.

Please explain further in depth.

Under the typical NUA scenario, a person retiring from their company will have a 401(k) that holds their company’s stock. For example, you worked at FPL or HEICO Corporation for many year. During that time, you or the company acquired company stock in the retirement plan and its appreciated quite a bit. You will have to consider doing an NUA transaction within 1 tax year following the year you retire. For example, if you retire on November 30, 2018, you have until the close of 2019 to do an NUA.

You have three options.

• (1) You can do nothing and keep your money at the 401(k) as long as they will do business with you.
• (2) Take a lump-sum distribution from the 401(k) and roll the entire balance into a Rollover IRA, not taking advantage of the NUA.
• (3) Make a lump-sum distribution from your 401(k). Distribute the shares of the company stock into a taxable brokerage account, and roll over the rest into a Rollover IRA.

Tax Consequences

If you take advantage of the NUA, you will immediately owe ordinary income tax on the original cost basis of the shares. The cost basis is what you paid for it, presumably long ago. Tax is due on the appreciated aspect of the stock when you sell it. The NUA constitutes the difference between the cost basis and the fair market value. the FMV is the exchange traded price, in many cases. If you later sell the company stock, any gain will be taxed as a long term capital gain.

NUA TIP: If there is any after-tax money  accumulated in the 401k, then a portion of these monies could be used to reduce the amount of the cost basis, which will lower the tax bill.

What happens to the stock after the NUA Transfer is complete?

The stock carries its cost basis from the 401k. However, when the taxpayer sells, he or she realizes a gain on the appreciation of the stock above the cost basis. Upon sale or liquidation of the stock, long-term capital gains apply to the sale proceeds at long-term capital gains rates.

NUANCE: The gain on the stock on the date of transfer is treated as long-term capital gain. The law deems it long-term. However, any subsequent appreciation of the stock above its fair market value on the date of transfer is treated as a short-term capital gain until 1 year passes from the date of the lump-sum distribution.

EXAMPLE: Assume a taxpayer distributes NUA stock on April 17, 2019. The stock had a cost basis of $10 and a fair market value of $22. Assume a tax rate of 37%. In 2019, the taxpayer owes ordinary income tax on the stock basis. The tax due is $3.70. The difference between the cost basis and the FMV is $12. This is the NUA. Assume the stock later appreciated to $23. Assume the Taxpayer sold it on April 23, 2019. In such a case, the taxpayer would also owe long-term capital gains taxes on the $12 appreciation, and short-term capital gains taxes on the difference between the $22 FMV on the date of distribution and the $23 sale price. The gain is not subject to the Additional Medicare tax. The custodians report the NUA on Form 1099-R and the subsequent sale on Form 1099-B.

When is an NUA ideal?

The NUA becomes attractive when you hold highly appreciated company stock in your 401k.

There are many IRS rules that govern a former 401k participants eligibility to use of the NUA transfer. It is important to consider these rules before making the decision to take advantage of the NUA transfer election.

Net Unrealized Appreciation – NUA – 2018

Net unrealized appreciation rules

Frank Duke Method

Net unrealized appreciation 401k