net unrealized appreciation

Example

“The net unrealized appreciation strategy saved him $40,000 in taxes on his company stock.”

Memory Tip

NUA — company stock in your 401k may deserve special tax treatment. Worth examining.

Why It Matters

Net unrealized appreciation matters because it can save you thousands of dollars in taxes when you leave your job or retire with company stock in your 401k. By using this strategy, you can pay capital gains rates, which are typically lower than ordinary income tax rates, on the growth portion of your stock holdings.

Common Misconception

Many people mistakenly believe that all money in a 401k must be taxed as ordinary income when withdrawn, but net unrealized appreciation allows a special exception for company stock that lets you defer capital gains taxes. This strategy only applies to employer company stock and does not work for other investments held in the 401k.

In Practice

Suppose you bought company stock in your 401k for 50 dollars per share and it grew to 150 dollars per share by the time you left the company with 1000 shares. Using net unrealized appreciation, you would pay ordinary income tax only on the original 50000 dollars cost basis, while the 100000 dollars in appreciation could be taxed at favorable capital gains rates when you eventually sell the shares.

Etymology

IRS provision for employer stock in retirement plans — often overlooked tax strategy.

Common Misspellings

Related Terms

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