Save on Taxes in Your 401(k) with Net Unrealized Appreciation [Video]

If you own employer stock, think twice before rolling over your 401(k)! With the Net Unrealized Appreciation strategy, you could save in taxes! In this video, we explain what NUA is, how to rollover your 401(k) with this strategy, and how it can impact your retirement plan.

Video Transcript

If you are a professional planning to retire, rolling over your 401(k) into an IRA could cost you tax opportunities.

Hello, my name is Michelle and I’m a financial advisor here at Financial Design Studio. We help business professionals retire in a tax efficient way. If retirement is getting close for you, we have a free retirement guide that you can download here, which is also linked below.

In today’s video, we’re gonna talk about a tax saving strategy that applies to professionals who own their employer’s stock in a 401(k). But I want to be careful because this is not a do-it-yourself tax tip. It’s a planning decision that can have ripple effects across your retirement. So let’s dive in.

What is Net Unrealized Appreciation?

The specific strategy that we’re talking about today is called Net Unrealized Appreciation (NUA). This strategy is for people who have a 401(k) that you’ve been saving into over your career, and that 401(k) owns your employer stock in it.

Normally, when you retire, you rollover your 401(k) into an IRA so that you can withdraw funds. Because you got a tax benefit by contributing to your 401(k), now when you withdraw the money out of that IRA, you’re going to pay ordinary income tax those funds.

With the NUA strategy, instead of rolling the full 401(k) into an IRA, you move your employer stock out separately. This means you can actually get taxed at capital gains levels (0% to 15%) instead of income tax rates (10% to 37%).

How Do You Accomplish Net Unrealized Appreciation?

In this example, let’s assume that you’re getting ready to retire, you’re in the 32% tax bracket. Your 401(k) has a total value of $1M. In it, you have $500,000 in a target date fund and $500,000 in your employer stock. Remember, you only get tax benefits when you handle Net Unrealized Appreciation properly. Here’s how.

So that first half that was invested into the target date fund, you will rollover to your IRA just like normal. And when you withdraw those funds, you’ll pay regular income tax on that amount. On the target date fund, which is worth $500,000, this person would pay $160,000 in income tax.

Now the other 50% in the company stock is also worth $500,000. But these funds you’re going to roll out to a taxable brokerage account, in-kind. You will not put them into the IRA. You will not sell them. If this is done properly and you had a qualifying event, now you can pay tax at long-term capital gains rates. So they’re paying 15% on this portion, which is $92,000 in taxes.

If you had simply rolled over the entire balance of your 401k into your IRA, you would actually be paying $320,000 in taxes. What you can see here is you would be saving $68,000 in taxes by doing this correctly.

What are the NUA Qualifying Events?

With this tax strategy, there are some specific rules that you need to make sure you qualify for in order to use this. It needs to be a qualifying event:

• You’ve actually separated from service from your employer, whether that was voluntary or not.
• You need to also be beyond 59 and a half, so older than 59 and a half.
• You are disabled, but must be self employed.
• You are the beneficiary of someone who has died.

Should You Use the Net Unrealized Appreciation Strategy?

Once you’ve decided that you do meet all of the criteria and you could benefit from this, it next becomes a question of should you use this strategy? Once those funds are in the IRA or they’re in the taxable brokerage account, these are the questions that we start to ask you and ask ourselves for whether this makes sense.

• First of all, is this employer stock, a holding that you even want to own? Does performance of this holding typically does well? We want to make sure that we’re invested in things that we can depend on so that those funds are there when you need them.
• That becomes a question of diversification. How much of this stock do we want to hold? Are we too concentrated? Do you own too much company stock?
• And we can even use this stock in other ways for your plan! Do you like to gift stock? You can donate appreciate stock to charitable organizations, and then you don’t pay any tax on the gain of the stock.

What you can see is that the goal is not to just get the tax savings.

The goal is that we want your retirement plan to work for you. We want it to meet and achieve the things that you want it to reach. We know that not every strategy is for everyone, and it’s worse if you try to make them apply where they don’t. You can cause huge setbacks to your retirement plan

Next Steps

At the end of the day, it’s questions like these that are why people nearing retirement work with financial advisors like us who manage investments alongside comprehensive planning. This is how you can create a tax efficient retirement.

if you resonated with any of these topics, you can find our free retirement planning guide linked below.

And if you want our team of financial advisors to support your retirement plan, this is what we do best. Our team specializes in tax efficient retirement planning for individuals with executive compensation. So you stay on track all year, every year, reach out to our team at to schedule a 45 minute consultation.

We will see you there or in the next video!

Bonus: Our Free Retirement Planning Guide!