TAXES, UNDERSTANDING INVESTMENTS
You may have heard of the Net Unrealized Appreciation (NUA) tax break. This is a special rule that allows you to qualify for capital gains treatment on distributions of appreciated employer stock from your employer plan. With the market doing well, now may a be a time when this strategy is more appealing than ever. You may understand the basics of how these rules work but here are five facts about NUA that may surprise you.
1. Immediate long- term capital gains treatment is available
No waiting is necessary with the NUA strategy. The NUA is taxed as a long-term capital gain, even if you sell the employer stock only days after you take the distribution from your plan. You do not have to hold the stock more than one year to qualify for the long-term capital gain rate on the NUA. Be aware though, any appreciation from the distribution date through the date of sale does not automatically qualify for the long-term capital gain rate. You would have to hold the stock the required time to qualify any further appreciation (beyond the NUA) for the long-term rates.
2. Beneficiaries can use NUA too
NUA is not just for plan participants. If you are a beneficiary, you can use the strategy too! Many people are not aware of this and beneficiaries often miss a very significant tax break. Don’t make this mistake. If you are the beneficiary of a company plan check to see if that plan includes highly appreciated company stock, if so, you may be eligible to claim the NUA tax break.
3. Not all or nothing
NUA is not an all or nothing proposition. While you still have to take a lump sum distribution of your employer plan, you can choose to use only some of the company stock to take advantage of the NUA and roll over the rest of the company stock to an IRA. You can find a plan that works best for 5 NUA Facts That May Surprise You.
You may be more comfortable with a smaller tax hit in the year of the lump sum distribution, even though you may get less long-term benefit from NUA.
4. NUA Survives Mergers
Mergers, acquisitions, spin-offs and corporate reorganizations don’t end the ability to use the NUA tax break. In several Private Letter Rulings (PLRs), IRS has said that the basis of company stock that qualifies for the NUA tax break will not be changed or lost because of the corporate reorganization, merger, spin-off or reorganization, even when the companies are no longer members of the same controlled group after the reorganization. If this is your situation, be sure you receive the correct basis in your company stock, which may include basis carried over from former companies that were once part of the existing company.
5. You Can’t Afford a Mistake
You may not be aware that a seemingly small violation of the rules can result in the loss of the NUA strategy. Many taxpayers have learned this lesson the hard way. They mistakenly rolled over company stock from their plan to an IRA or they failed to take a lump sum distribution. They discovered that these mistakes were irreversible and the NUA break was gone forever. Because the consequences are so serious, you cannot afford to make a mistake with the NUA rules. If you are thinking about using this strategy be sure to consult with a knowledgeable tax or financial advisor.
If you have questions, please feel free to reach out to me.
Barbara Norman, CFP® ChFC®
Copyright © 2017 Ed Slott and Company, LLC
Reprinted from The Slott Report, August 7, 2017, with permission.
Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
These materials are provided for general information and educational purposes. We cannot assure the accuracy or completeness of these materials. Sage Path Solutions does not provide tax, or legal advice. Please consult with your tax or legal expert for advice pertaining to your own situation.