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Executive Acronyms: NUA

Retirement Funding


Welcome to Curt's Chalk Talk, the Executive Acronym Series. I'm Curt Sheldon with C.L. Sheldon & Company. And today, we're going to talk about NUA or net unrealized appreciation. 

This applies when you have company or employer stock inside your 401(k) . Under normal circumstances, when you transfer funds out of a 401(k), they're taxed as ordinary income, which is at a higher rate than capital gains rate currently. Under this very special rule, you can transfer company stock directly to a taxable account, and you only pay taxes on the amount you paid for this stock inside the 401(k) .

That is taxed as ordinary income, but taxes on any gains are deferred. And when you sell those capital assets in the future, they will be taxed as capital gains, which as I mentioned, is at a lower rate than ordinary income. Now there are some pretty specific rules on these, and you might want to get help. But here's the general idea.

You've got to transfer the funds, those appreciated assets, directly from your 401(k) to a taxable account. It has to be the first year you make any distributions from your 401 . You have to empty out your 401(k) of all other assets as well. However, you can transfer these to an IRA and defer taxes on them. And unlike most other capital assets, assets that have net unrealized appreciations do not get a step up on basis upon death. So, you wan to make sure that your heirs are aware if you have this type of arrangement.

If you have questions about employer compensation plans, check out our white paper at www.clsheldon.com/executive. That's www.clsheldon.com/executive.


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