Friday, June 27, 2014


If so, you may be unaware of a little known tax strategy that could save you thousands of dollars.  The tax strategy is known as Net Unrealized Appreciation and applies to situations where employer stock is held within an employee retirement account of the employer.  Here is a quick example of how it may save you on taxes.

Assume an executive in the 39.6% tax bracket decides to change employers at age 60.  She holds $200,000 worth of company stock with a cost basis of $40,000, resulting in net unrealized appreciation of $160,000, and she wants immediate access to the funds.

She decides to distribute the assets into a taxable account and elects NUA tax treatment.  She pays income tax at the ordinary tax rate on just her $40,000 costs basis, a tax of $15,840.  She then immediately sells her company stock and pays 23.8% capital gains tax on the stock’s $160,000 NUA.  The total capital gains tax is $38,080. The total tax on the distribution is $53,920, leaving her with $146,080.

Compare this to an alternate strategy of converting the company stock to normal IRA account.  Upon distribution, the entire amount would be taxed at the ordinary income tax rate.  Assuming she remains in the top tax rate of 39.6%, she would be facing total taxes of $79,200 on the $200,000 distribution.  In this case, she would have saved $25,280 in total tax.

The IRS rules on NUA are very strict and it is very important to seek consultation to determine if you would qualify.  Also, you don’t want to let taxes dictate investing decisions.  Make sure to first consider if the sale fits within you long-term plan and then see if this tax strategy makes sense for you.
Nick S. Wold, CPA, MA