Many long-tenured employees accumulate a meaningful amount of company stock inside their 401(k) plans over the course of their careers. For some individuals, that position can grow to represent hundreds of thousands or even millions of dollars.
When retirement approaches, most people assume the only option is to roll their entire 401(k) into an IRA. In many situations, that is the right decision.
However, when a retirement plan contains highly appreciated company stock, there is another strategy worth evaluating: Net Unrealized Appreciation (NUA).
NUA is a provision in the tax code that allows a portion of retirement assets, specifically employer stock, to receive long-term capital gains treatment instead of ordinary income treatment.
When the circumstances are right, the tax savings can be significant.
Like many advanced tax strategies, it is not appropriate for everyone. The goal of this paper is to explain how the strategy works, when it may make sense, and when it may not.
