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What Is Net Unrealized Appreciation?

NUA ALONE

We’ve discussed how to utilize the Net Unrealized Appreciation (NUA) treatment of distributions from your qualified retirement plan (also known as QRP, meaning 401(k), 403(b), and other plans) – one of the earlier articles on Net Unrealized Appreciation can be found at this link.

Even though the process is explained in the earlier article, we didn’t discuss just what exactly can be treated with the NUA option.  How do you determine what part of the distribution can be treated with capital gains treatment?

In order to determine what is to be treated as unrealized appreciation, we need to define what has to be treated as ordinary income from such a distribution.  Briefly, the way that the NUA option works is that you take a complete distribution of your QRP account within one tax year – and you have the option to treat a portion of your account distribution with capital gains.  The portion that can be treated as capital gains is the amount of growth that has occurred in the value of company stock (your company, the one that you have the retirement plan with).

Not all of the company stock in your account is necessarily available for NUA treatment.  This is where we’ll define what cannot be treated in that fashion. The following items cannot be used for NUA, and they make up the basis of the company stock in your account:

  • Your contributions to the plan that are attributable to the employer stock
  • Your employer’s contributions to the plan, attributable to the employer stock
  • The Net Unrealized Appreciation in the stock attributed to employer contributions

Those three items will be taxed as ordinary income in the year that the distribution occurred.  So, the only thing that is left, Net Unrealized Appreciation of the company stock purchased with your own contributions, can be taxed with capital gains tax – instead of ordinary income tax, as all other pre-tax distributions from the plan are treated.

This is not an all-or-nothing provision.  You have the option to elect NUA treatment for only a portion of your overall distribution from the account.  Everything else could be rolled over into another QRP or an IRA, further deferring taxation.

Holding period

The stock distributed from the employer plan that you’ve elected to use NUA treatment on is treated as having been held for greater than one year.  Therefore, the growth that is distributed (the NUA) will have the characteristic of long-term capital gains tax treatment.  Additional gains beyond the initial NUA have a holding period that begins with the date of distribution – so it could be short-term or long-term capital gains, depending on when you take the distribution.

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6 Comments

  1. […] you take advantage of the Net Unrealized Appreciation (NUA) treatment for stocks transferred from your employer retirement plan, you need to fully […]

  2. […] I’ve written much about the Net Unrealized Appreciation (NUA) treatment for company stock in a 401(k) plan – this is the provision that allows you to pull out company stock as part of a full distribution from the plan and get favorable tax treatment for the gain on the stock.  More about NUA can be found in this article about Net Unrealized Appreciation Treatment. […]

  3. [...] may be reasons to leave your old plan at the old employer though.  The two that come to mind are NUA treatment of stock of the old employer, and if you think you’ll need access to the funds before you leave [...]

  4. [...] that you own in the plan.  Part of this distribution may be taxable (see this article on NUA, Net Unrealized Appreciation, for more details).  The portion of the distribution that is taxable will be subject to the [...]

  5. clydewolfNo Gravatar says:

    Jim,

    I’m confused…..you say, “The following items cannot be used for NUA,”.
    And the first item on the list is: *”Your contributions to the plan that are attributable to the employer stock”.

    Could you give a better explanation or an example of company stock in that situation?

    Because later you say, “the only thing that is left, Net Unrealized Appreciation of the company stock purchased with your own contributions,”

    Maybe another explanation or example is needed.

    Maybe I’ll have to break down and buy a copy of your IRA Owner’s Manual.
    I know I would have trouble wrestling the Kindle from my spouse.

    Thanks.

    1. jblankenshipNo Gravatar says:

      Hi Clyde -

      The contributions attributable to employer stock are basis, not NUA. I realize that my point wasn’t very clear in the article.

      PS – email me on the side.

      jb

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