NUA

This describes options for your company stock and explains some of the tax consequences for each. Remember what’s best for you will depend on a variety of factors, so you are strongly encouraged to consult a professional tax advisor about your particular situation.

How do you qualify for NUA treatment?

  • You must distribute your entire balance in the 401k within one tax year (though you do not have to take all distributions at the same time).
  • You must take the distribution of company stock as actual shares. You may not convert them to cash before distribution.
  • You must have experienced one of the following:
    • Separation of service from your company
    • Reached age 59 ½
    • Death

Consider Tax Consequences

Only shares of your company stock are eligible for the special NUA tax treatment.

You can roll over any portion you choose to an IRA or other qualified plan to defer taxes on that portion.

If you are no longer an employee and you can take a partial withdrawal amount from the 401k, the withdrawal disqualifies you from using the NUA as part of a future-year total distributions unless there is a subsequent triggering event. A subsequent triggering event is defined as death of attaining age 59 ½.

Moving your company stock: Possible tax scenarios

Distribution Option 1:

Roll over your company stock to an IRA. When you leave the company, you have the option to roll over your company stock from your 401k directly to an IRA (called and in-kind distribution). With this option, you are generally not taxed at the time of rollover. However, the special NUA tax advantages will not apply because the distribution from the IRA’s are taxed as ordinary income tax rates. This option may still make sense if the NUA is a small percentage of the stock’s market value, or if your investment time horizon is long enough, since the tax-deferred growth may be achieved for many years in an IRA.

Tax Considerations:

Within your 401k account

  • You defer paying taxes on your initial company stock investment (cost basis) and your NUA until you take a distribution.
  • Distributions are taxed as ordinary income.

Upon direct, in-kind rollover to an IRA:

  • No taxes due
  • Special NUA tax advantages for stock do not apply

Upon withdrawal from your IRA at age 59 1/2

  • You are taxed as ordinary income tax rates on your cost basis. NUA, and further appreciation within your rollover IRA.

Distribution Option 2:

When you leave the company, you may also have the option of transferring your company stock in kind to a taxable, non-retirement brokerage account. The cost basis of the stock is taxes as ordinary income tax rates in the year the stock is distributed from the plan. When you finally sell your shares of company stock, you are subject to long-term capital gains on the net unrealized appreciation at distribution. Any additional appreciation should be taxable as short-term or long-term capital gains, depending on how long you held the stock after it was distributed in kind from the plan.

Tax Considerations:

Within the 401k

  • You defer paying taxes on your initial company stock investment (cost basis) and your NUA until you take a distribution.

Upon direct, in-kind transfer to a taxable, non-retirement brokerage account

  • The cost basis of the stock is taxed at the ordinary income rates in the year the stock is distributed from the plan.

Upon sale of the shares

  • Your NUA at the time of distribution is subject to long-term capital gains taxes, which is generally lower than ordinary income taxes. You will also be subject to either long-term or short-term capital gains on any appreciation since distribution from your 401k.

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