Net Unrealized Appreciation rule taxes employer stock gains at lower capital gains rates, reducing federal tax liability for retirees.
Retirees holding $400,000 in employer stock within a 401(k) could save roughly $65,000 in federal taxes by using the Net Unrealized Appreciation (NUA) rule. The rule taxes stock appreciation at long-term capital gains rates instead of ordinary income rates applied to IRA withdrawals.
For example, a $400,000 employer stock position with a $60,000 cost basis would incur about $65,400 in federal tax under NUA, compared to a significantly higher bill if rolled into an IRA. IRA withdrawals may also increase taxable Social Security benefits and trigger Medicare surcharges.
The NUA rule applies only to employer securities held in a qualified plan and requires a triggering event such as retirement or reaching age 59½. Advisors often overlook the strategy, potentially costing retirees tens of thousands in unnecessary taxes.