Net unrealized appreciation

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Net Unrealized Appreciation

The tax difference between a stock placed into a tax-deferred account such as a 401(k) or IRA and the same stock in a brokerage account. Most withdrawals from a retirement account are taxed as ordinary income, whereas most withdrawals from a brokerage account are taxes as capital gains. In the United States, capital gains tax is often less than the income tax rate; this means that even though the fair market value of two shares of a stock may be the same, the net yield of the share withdrawn from the retirement account will be less than the share withdrawn from the brokerage account. For this reason, many money managers advise rolling-over the stock an employer places into one's tax-deferred retirement account into a regular brokerage account.

Net unrealized appreciation.

Net unrealized appreciation (NUA) is the difference between the average cost basis, or purchase price, of company stock you hold in an employer sponsored retirement plan and its current market value.

The effect of your NUA is something to consider if you're retiring or leaving your job and plan to roll over plan assets to an individual retirement account (IRA). That's because it may make more sense, from a tax perspective, to take a distribution of the stock.

At distribution, you owe income tax on the cost basis of the stock at your regular rate. But the NUA is taxed at your long-term capital gains rate at the time you sell the shares, either immediately or in the future. Additional capital gains taxes apply on any appreciation in the stock's value that occurs after the distribution and before you sell the shares. That tax is also calculated at your long-term rate if you waited more than a year to sell.

In contrast, if you roll the shares into an IRA, you owe income tax at your regular rate on all distributions including the portion that is appreciation. The long-term capital gain tax rate never applies.

Taking a distribution of the stock may not be the best choice in all cases. You may incur a 10% tax penalty in addition to the tax on the cost basis if you're younger than 59 1/2. In addition, this strategy may not be the most tax-efficient for estate planning purposes if you still own the shares at your death.

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Clients whose qualified retirement plan assets contain appreciated employer securities may be eligible to take advantage of the net unrealized appreciation tax break.
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The gain on the securities, while they are held by the qualified retirement plan (the net unrealized appreciation (NUA)), is not subject to tax until the taxpayer elects to have the NUA included in income at the time of distribution.
Thus, the taxpayer was not currently taxed on the net unrealized appreciation of the employer stock.