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Retired Military Finances 401: Net Unrealized Appreciation Thumbnail

Retired Military Finances 401: Net Unrealized Appreciation

Retirement Funding Taxes

Employer Stock in Your 401(k)? Check This Out

If you've purchased company stock in your 401(k), I've got a special deal for you G.I. You are eligible for special tax treatment of that stock. Employer stock is eligible for what is called Net Unrealized Appreciation (NUA). This stuff is complicated (that's why it is a 401 article) but if employed correctly, you can save a lot of tax money.

Here are the basics. You have the option to take the stock out in-kind (without selling it) and you will pay taxes on the amount you paid for the stock, not the Fair Market Value (FMV). The taxes on the increase in price of the stock will not be taxable until you sell your stock. And here's the best part. Since the gains will be long-term capital gains you're taxed at a lower rate. It could be as low as 0% and won't go above 23.8% (including ObamaCare surtaxes). In almost all cases, the tax will be 40% or so less than the tax would that would be paid if the stock was taken out as a normal distribution (sell it and take a cash distribution).

There are some things you need to do right though.

  • The stock must be transferred out in-kind which means you don't sell it. For example, you withdraw 100 shares of IBM stock (assuming you work for IBM)
  • If the stock somehow ends up in an IRA, you lose the ability to take advantage of NUA
  • You must completely empty out the 401(k) the year you transfer the stock out of the 401(k) plan. You can move the remainder to an IRA
  • You can't take distributions from the 401(k) prior to the year you take the NUA distribution
  • Make sure your heirs understand the stock has NUA. This stock will NOT receive a step-up in basis upon your death

As with most advanced tax strategies, this needs to be done right. Just like you did during your military career, consider bringing in a SME.

If you enjoyed this article, you might like the following blog posts:

Retired Military Finances 401: Restricted Stock Units

Retired Military Finances 401: Non-Qualified Stock Options

Don't Leave Money on the Table (and Don't Get Double Taxed Either)

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