Ryan discusses net unrealized appreciation (NUA) using the exxon (xom) 401k plan as an example.
Net unrealized appreciation creates substantial tax benefits to include long term capital gains tax rates on the sale of stock. Dividends are also taxed as long term capital gains which can be much lower than ordinary income tax rates. Net unrealized appreciation can be a complicated transaction so learn before you leap.
Retirement planning can be overwhelming and confusing, with so many terms and concepts to comprehend. One such term is Net Unrealized Appreciation (NUA), which can seem complicated but is worth understanding, especially if you have worked for a major oil company like Exxon or have company stock in your 401k plan.
NUA allows you to take advantage of the appreciation in the value of your company stock inside your 401k plan, which you have purchased over the years using your contributions. Using Exxon as an example, let’s assume your 401k has $2 million in Exxon stock, and you have calculated that the basis on this stock is $700,000.
To exercise an NUA transaction, you roll the $700,000 basis stock out of the 401k plan and move all of that stock to an after-tax brokerage account. You will pay tax on the cost basis of $700,000 at ordinary income tax rates, right then and there. At the Exxon plan, there is after-tax money in the plan that you can use to pay the taxes due on the cost basis of the stock.
You can also sell some of the stock and pay for the tax, or use money outside the 401k, such as your checking or savings account, to pay the tax. After moving the stock to the brokerage account, it now qualifies for long-term capital gains tax rates, which can be much lower than ordinary income tax rates.
If you leave the money inside the 401k plan and die, your beneficiaries will not get the benefit of a stepped-up basis in the stock price. Every dollar they inherit will be 100% taxable to them. However, if you had done an NUA transaction, you could have moved the money over to a broker’s account and left it to the next generation, creating a potentially significant tax benefit.
The NUA can only be used once, so if you do a 401k rollover, you can only use it at that point in time. Doing an NUA transaction is relatively simple, and you can call up your plan provider and request to execute it. It is important to note that NUA applies only to employer stock inside your 401k plan and not to other types of investments.
In conclusion, understanding Net Unrealized Appreciation (NUA) is an essential aspect of retirement planning, especially if you have employer stock inside your 401k plan. NUA allows you to take advantage of the appreciation in the value of your company stock and potentially save on taxes by moving it to a brokerage account.
By doing so, you can benefit from long-term capital gains tax rates, which are often lower than ordinary income tax rates. It is crucial to note that NUA only applies to employer stock inside your 401k plan and not to other types of investments. Ultimately, doing an NUA transaction is relatively simple, and it is worth discussing with your plan provider to explore potential tax benefits and optimize your retirement savings.
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