Now is the Time to Consider NUA

By Sarah Brenner, JD
Director of Retirement Education
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For many people, 2020 has meant leaving a job. Some jobs have disappeared. Some workers are taking early retirement. This means that many workers are receiving distributions from employer plans. Many individuals may assume that the right move is to roll over those retirement funds to an IRA. Not so fast! For many people, a rollover will be a smart decision. However, don’t assume that is always the way to go. In some cases, as strange as it may sound, taking a lump sum distribution and paying taxes is a smart choice. You may be wondering how that could be possible. Well, a tax break called Net Unrealized Appreciation (NUA) may make taking that lump sum distribution a good choice in 2020.

Are You a Candidate?

Can you benefit from NUA in 2020? Well, ask yourself two questions. The first question is, “Do I have company stock in my 401(k)?” The second question is, “Is it highly appreciated?” To determine if the stock is “highly appreciated” (which is really a subjective term), look at what the cost was when the shares were purchased vs. what today’s value is of those shares. If the answer to both question is “yes,” you may be a good candidate for the NUA tax break.

How the NUA Tax Break Works

Here is how the NUA tax break works…. You withdraw the stock from the company plan and pay regular income tax on it, but only on the original cost to the plan and not on the market value, i.e., what the shares are worth on the date of the distribution.

The difference (the appreciation) is the NUA. NUA is the increase in the value of the employer stock from the time it was acquired in the plan to the date of the distribution to you. You can defer the tax on the NUA until you sell the stock. When you do sell, you will only pay tax at your current long term capital gains rate.

Now is the Time to Act

To qualify for the NUA tax break, the distribution must occur after a triggering event. Triggering events include: death; reaching age 59½; separation from service (not for self-employed); or, disability (only for self-employed).

The distribution must also be a lump-sum distribution. This means you must empty the entire account in one tax year. Time is running out to take a lump sum distribution for 2020. You must be sure there is enough time to complete the transaction and there are only a few months left in 2020. With limited exceptions, if the account is not emptied by the end of the year, you cannot use NUA.

Be careful! Remember, if you roll over the highly appreciated stock to an IRA, you will lose the NUA tax break.

Is NUA Right for You?

NUA sounds like a great strategy. However, it is not for everyone. Is it for you? Well, generally, NUA can be a better strategy than a rollover if you are in a high tax bracket with a large portion of your retirement assets in highly appreciated company stock. You must be willing and able to pay an immediate tax bill on the cost basis of your stock. There are many factors to consider and many pitfalls to avoid. If you are interested in learning more about NUA and how it could benefit you in 2020, you will want to consult a knowledgeable tax or financial advisor.


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