From SunAmerica Asset Management Corp.
NUA may help you save hundreds of thousands of dollars in income tax!
Here’s a hypothetical illustration:
Let’s assume that you have employer stock in a 401(k) that’s worth $1,000,000. Your marginal income tax rate is 35%. The cost basis of your stock is $200,000, meaning that you have a Net Unrealized Appreciation (NUA) of $800,000. Upon retiring from your company at age 65, you must choose between a lump-sum distribution and a rollover into an IRA.
As you can see from the above table, if you choose the rollover option, you won’t have to pay income tax at the time of the distribution. However, when you sell the stock, you must pay ordinary income tax on the entire distribution amount of $1,000,000. Your income tax would total $350,000. In comparison, by making a company stock transfer, you pay current income tax of $70,000 based on the $200,000 cost of the stock. When you eventually sell the stock from your brokerage account, you only have to pay a maximum capital gains tax of $120,000 (15% of the $800,000 NUA). With the NUA Strategy, your total tax liability is $190,000, representing a tax savings of $160,000 versus the rollover option!
Please keep in mind that you should only use the NUA tax break strategy if the company stock is highly appreciated. Because tax is paid on the withdrawal at ordinary income tax rates, the NUA must be significantly higher for the strategy to pay off.