As the market soars and more older workers retire, those sitting on appreciated employer stock in their 401(k) plans may have an opportunity to pay lower taxes on part of that growth.
The strategy, known as net unrealized appreciation, or NUA, allows someone to lock in lower capital gains rates rather than paying income taxes on a portion of employer stock appreciation.
Although President Joe Biden has proposed levy hikes on the wealthy, income tax rates for top earners are currently 37%, whereas capital gains peak at 20%, offering the potential for future savings.
The biggest mistake is not completing the transaction all in one calendar year.
Brian Schmehil
Director of wealth management at The Mather Group
However, the chance to secure NUA disappears when someone rolls employer stock from their 401(k) to an individual retirement account, which is a common mistake, according to financial experts.
“NUA is potentially one of the biggest transactions someone will make in their life and can be one of the costliest if not done correctly,” said Adam Wojtkowski, certified financial planner at Smith Salley & Associates in Walpole, Massachusetts.
Moreover, NUA may not be suitable for all investors. Here’s what to know before attempting this.
Someone may only leverage NUA by taking a lump-sum distribution, meaning they empty their 401(k) within a single tax year. The transfer must happen after a “triggering event,” such as the account owner’s death,…
