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this means that even though the fair market value of two shares of a stock may be the same, the net yield of the share withdrawn from the retirement account will be less than the share withdrawn from the brokerage account.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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A lump-sum distribution is required in order to be eligible to use net unrealized appreciation (NUA) treatment.
One such strategy involves rolling an employer's qualified plan directly to a Roth IRA (bypassing the "regular" IRA required prior to 2008) and being able to capitalize upon NUA (net unrealized appreciation) rules regarding appreciated employer stock.
When an employee owns company stock in a qualified plan that has appreciated in value, the stock may be eligible for special tax treatment under the net unrealized appreciation (NUA) rule.
Special tax treatment is available for the net unrealized appreciation (NUA) of employer stock and for distributions directly from a qualified plan to a participant who has "separated from service" after reaching the age of 55.
402(a) and (e)(4)(B), employees are not taxed on the net unrealized appreciation (NUA) when the securities are distributed; in other words, on distribution, the employees are not taxed on the securities' full fair market value (FMV).
Moreover, there can be a tax advantage to owning company stock, called "net unrealized appreciation." This strategy allows the employee to withdraw stocks from the retirement plan at a more favorable rate than if the stock is left in the plan and later taken out as a standard withdrawal subject to ordinary income taxes.
The difference between the securities' cost basis and the market value upon distribution--the net unrealized appreciation (NUA)--is not taxed at the time of the distribution from the employer's plan.
Also, if your distribution includes publicly traded company stock, favorable long-term capital gains tax treatment is available on the net unrealized appreciation of your distribution.
Main Street estimates that the increase in NAV per share is primarily due to net unrealized appreciation relating to its Lower Middle Market portfolio investments and the accretive impact from equity issued under its at-the-market equity program.
The Board reviews the Fund's distribution on a quarterly basis in view of its net investment income, realized and unrealized gains, and other net unrealized appreciation or income expected during the remainder of the year.
Roth conversions, net unrealized appreciation opportunities, annuities, life insurance and retirement plan contributions are all areas tax-minded advisors need to familiarize themselves with, Keebler said.
For the three months ended March 31, 2016, the net unrealized depreciation on investments was $1.0 million, or $0.09 per share, as compared to net unrealized appreciation on investments of $1.1 million, or $0.11 per share, for the three months ended March 31, 2015.