For employees approaching retirement with company stock in their 401k, it’s crucial to consider your eligibility to use Net Unrealized Appreciation (NUA) rules before you retire or otherwise reach a triggering event.

If you purchase or are awarded company stock in your 401k, those shares will have a basis. Think of basis as what you paid or in the case of a grant or special shares, what was paid on your behalf.

Should the value of those shares increase, the difference between the basis and the current value is – the net unrealized appreciation (NUA).

Unpacking NUA Stock

Net Unrealized Appreciation (NUA) is the difference between the cost basis of employer stock held in a company-sponsored retirement account, and its current market value. When an employee separates from their employer, they can distribute these assets while only paying tax on the basis, thereby unlocking the NUA strategy.

NUA is especially powerful when you have low-basis company stock

Benefits for Pre-Retirees

For individuals near retirement, NUA can be a game-changer in optimizing their retirement planning. Here’s how:

1. Tax Efficiency: Perhaps the most significant advantage of NUA is its preferential tax treatment. When distributing employer stock with NUA, only the cost basis is subject to ordinary income tax, while the appreciation is taxed at the typically lower or potentially zero % long-term capital gains rate. This tax advantage can result in substantial savings, allowing retirees to retain more of their hard-earned assets.
2. Enhanced Cash Flow: By leveraging NUA, pre-retirees can access a lump sum of cash to bolster their retirement nest egg. This infusion of funds can supplement other sources of retirement income, providing greater financial flexibility and security in the years ahead.
3. Diversification Opportunity: Holding a significant portion of retirement savings in employer stock poses inherent risks. NUA empowers pre-retirees to diversify their investment portfolio by liquidating employer stock and reallocating assets into a more diversified mix of investments. Diversification can help mitigate risk and safeguard against potential downturns in the stock market. Consider NUA before diversifying!

Factors to Consider

While NUA offers compelling benefits, it’s essential for pre-retirees to weigh the following considerations:

1. Financial Planning: NUA should be integrated into a comprehensive retirement plan tailored to individual goals, risk tolerance, and financial circumstances. Consulting with a financial advisor can help assess the suitability of NUA within the broader retirement strategy.
2. Tax Implications: While NUA provides tax advantages, it’s crucial to understand the tax implications of distributing employer stock. Pre-retirees should carefully evaluate the tax consequences and consider how they align with their overall tax planning strategy.
3. Investment Risk: Concentrating wealth in a single stock carries inherent risks. Pre-retirees should assess their risk tolerance and consider diversification strategies to manage investment risk effectively.

As pre-retirees embark on the journey toward retirement, leveraging NUA stock can be a strategic move to optimize their financial outlook. As with any financial strategy, careful planning, consultation with professionals, and a holistic approach to retirement planning are paramount to success.

If you’re wondering about your options, now is the time to get your questions answered. CLICK HERE to schedule an appointment.

 

All opinions expressed in this blog post reflect the judgment of Approach Retirement Advisors, LLC (“Approach”) as of the date of publication and are subject to change. The information in this blog post is believed to be factual and up to date; however, we do not guarantee its accuracy. This blog post should not be regarded as a complete analysis of the subjects discussed. This presentation is for educational purposes only and does not constitute personalized investment advice. A professional advisor should be consulted before implementing any of the strategies presented. This blog post should not be construed as an offer to buy or sell or as a solicitation of any offer to buy or sell any securities mentioned herein. Clients and members of Approach may own any securities mentioned herein. Investments are subject to market risks and potential loss of principal invested, and all investment strategies have the potential for profit or loss.  Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk. There can be no assurance that any specific investment will be suitable or profitable for a particular investor’s portfolio. There are no assurances that any portfolio will match or outperform any particular benchmark.