In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss a powerful and often overlooked tax strategy: Net Unrealized Appreciation (NUA). Joined by their in-house tax and financial strategist Taylor Wolverton, they break down NUA explained in a simple and clear way, helping you understand how company stock inside your 401(k) could lead to significant tax savings in retirement. Whether you’re currently working and approaching an in-service rollover 401k, or planning your 401k distribution strategy post-retirement, this episode provides critical insight for your financial decision-making.

Listen in to learn about how to leverage Net Unrealized Appreciation 401K rules to potentially pay lower capital gains tax instead of higher ordinary income tax, depending on how your 401(k)-company stock is handled. Radon, Murs, and Taylor walk through real-life examples of 401k retirement scenarios, helping you understand how the NUA strategy compares to traditional retirement account rollover plans such as moving funds into an IRA. If you’ve ever wondered about the tax difference between an IRA vs brokerage account, this episode helps you clarify your options.

In this episode, find out:

·     What Net Unrealized Appreciation (NUA) is and how it works.

·     Who qualifies for the NUA tax strategy and how to evaluate eligibility.

·     The tax differences between Capital gains vs ordinary income on company stock.

·     When to consider splitting assets between an IRA and brokerage account.

·     How NUA impacts your broader retirement tax strategy and required minimum distributions.

Tweetable Quotes:

“NUA lets you convert high-tax ordinary income into lower-tax capital gains—if you qualify, it could be a game changer.” – Radon Stancil

“Understanding your cost basis and when to use Net Unrealized Appreciation is key to smart 401(k) distribution planning.” – Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit: POMWealth.net/podcast

Here’s the full transcript:

Welcome to Secure Your Retirement Podcast. Today we have a guest with us,

a recurring guest, Taylor Wolverton. She is our in -house tax and financial planning

strategist. And so today we wanted to ask her about a very particular

financial

to an IRA. And I think first of all, we might think, well, then why do we do

that? What’s the purpose of doing that? And ultimately, a lot of times we’re doing

it because we have a lot more investment options in an IRA than we do in a 401K.

In a 401K, many times, you know, we’re very limited in what the 401K plan will

allow us to invest in. That’s one part. The other part is if I want to have a

professional money manager, somebody that help like we do, we’re, we’re not able to

do that in a 401k. So, I think first, before we get into this,

this little caveat that we’ve invited you to come on and talk about Taylor, and

I’ll just refer this over to you, Murs, really quick. Can you kind of walk through,

like, what is that process? Let’s not even talk about anything other than what we

kind of do. Most of the time, the, what it looks like getting the money from the

401k and to the IRA and some of the tax potential implications.

– Yeah. So, when we do a 401 (k) to IRA, it’s called a,

if you’re working, it’s called an in -service rollover. If you’re not working and

then it’s just a rollover in general. And what we’re trying to accomplish by doing

this is get it to an IRA in a place where it can be managed outside the 401 (k).

When we move to an IRA, typically we’ve got more options. You know, your 401k,

when you look at it, you may have 10 to 20 different mutual funds you can choose

from. When you go to an IRA, the world of investing opens up for you and the

ability to have that manage also opens up for you. So, the mechanism is that

rollover. In a nutshell, we help our clients do this. Typically, it’s done through a

phone call or sometimes some paperwork involved with the 401k provider, letting them

know we want to initiate this transaction, and we want to do it right, which means

we want to make sure that it’s going to the same type of account from a tax

perspective. So, it’s a traditional 401k. We want to make sure it’s going to a

traditional IRA pre -tax so that there are no tax implications there. If it’s a Roth

401k, which have picked up in popularity, we want to make sure it’s going to a

Roth IRA so that we maintain that tax -free status. And the logistics of it is

typically, in most cases, a check is being sent to your house for the amount of the

rollover and then you get it over to your advisor or if you’re managing yourself,

you deposit it into that IRA that’s been open for you. So that’s the logistics of

it. A key thing here is that if you are still working, you must be above the age

of 59 and a half to be eligible for this. So that’s The common question too is,

can I do this? How do I do this? When can I do this? Well, 59 and a half. And

if you roll it out, you still get to contribute to your 401k, you still get to

get the matches that you’re going to get through your employer, but now the balance has

moved out to be professionally managed. And so that’s the process in a nutshell.

Did I miss anything there? – No, I was just going to say, and then just to keep in

mind, when I do this, If I’ve put money into a 401k and I move it to an IRA it

doesn’t matter what it’s in the 401k or an IRA If I take the money out to use it

It’s going to be called income and I’m going to pay taxes on it at whatever income

rate I’m at and so if I move it to an IRA and then I start taking that

money out in a couple of years or tomorrow Whenever and I’ll say I take a hundred

thousand dollars out then that’s going to add a hundred thousand dollars of income

to my Tax return, and therefore I’m going to pay whatever tax rate I’m at in that

particular situation. So that, now I wanted you to get, make sure everybody had

their minds wrapped around this, but now there is this one extra thing that we

wanted Taylor to come on and talk about. And it’s this thing where it really

applies in a limited number of ways, but if you are a person who this might apply

to,

it could be something for you to at least understand. And what is called is NUA,

which stands for Net Unrealized Appreciation. So now you might hear that and go,

what in the world is it? So let me first of all ask you, Taylor, could you explain who it applies to and what does that whole little NUA mean as far

as that goes. Yeah, so the first requirement that’s important to know to even

qualify for this NUA net unrealized appreciation, you have to have employer stock

inside of your 401k. So first of all, you have to have worked for a public

company. Let’s say if you work for IBM, and you have IBM stock inside of your

401k, it’s possible that you could qualify. And the advantage that NUA gives is that

with that employer stock inside of your 401k, when we roll that out of the 401k,

we can transfer the employer stock in particular to a brokerage account instead of

the traditional IRA as we were talking about is more typical. Once that employer

stock is transferred to the brokerage account, the cost basis of that stock is taxed

as ordinary income. And then the gain on the employer stock while it was inside of

your 401 (k) can be taxed as long -term capital gains. So, it’s a difference in how

the employer stock is treated for tax purposes in particular and also just the type

of account that it goes to. The whole point of it is to give you the opportunity

to pay tax at the lowest rates. Of course, it does require, you know, the

determining what the cost basis is versus the gain and things like that. But that’s

essentially the goal is to take advantage of the more or the lower,

I guess I should say, long -term capital gains rates, if and when you do have

employer stock in that account. – Okay. – I just want to say before we hop

to another thing. – That’s a lot. I just want everybody to know that we’re going to

walk through some examples. We’re going to walk through a lot of different things on

this. So, we just wanted her to say it. And now we’re going to take some time so

that everybody can understand it. So, I didn’t want to interrupt you the immerse, but

go ahead and you can kind of start taking us down the path. Yeah. Well, I wanted,

I want to, I guess, clarify a couple of things first. So, uh, so you said employer

stock. So, I work for IBM, and I’ve got a 401k. A lot of times people are just

picking in the mutual funds, but in some 401k plans, you do have the ability to go

just buy that stock directly, right? And it may be also through like profit sharing

plans. I know sometimes like publicly traded employers, they might be giving you IBM

stock or whatever the company is in place of like an employer match or in addition

to that. So that could also be a possibility. Okay, so I have IBM in my IBM 401

(k) plan. So, so far, I qualify for this thing called net unrealized appreciation.

And then you mentioned something around benefits on taxes. So, when I just explained

the 401 (k) rollover process, that’s going from 401 (k) to IRA, but now you’re saying

we could do 401 (k) to IRA and also potentially some of that to a brokerage

account. So, divvying up some and it sounds like it could be advantageous.

So can we walk through an example of let’s stick with IBM, let’s walk through an

example and put numbers to it so people can actually understand what you mean by

moving the money out and basis. That’s a weird, that’s a fun tax term. So, let’s

walk through a few of those. – Yes, one other thing I will say too that I didn’t

mention initially is that you, in order to qualify, you also have to either be

separated from service or over the age of 59 .5 or death is also a qualifying

event. So, you have to have one of those three triggers as well to even go down

the path of pursuing whether this strategy is going to work for you or not.

So yes, let’s go to an example. Okay, I’m sorry. I just, since you just said that,

just also, can, could I, if let’s say I want to do this in -service thing and I

got IBM stock, can I just do the IBM stock by itself? You have IBM stock and

other funds. And other funds. Yeah.

One of the requirements to receive the NUA treatment is that you have to roll out

the entire 401 (k) balance in one year. So, if I’m going to do NUA in 2025,

my 401k balance on December 31st, 2025, has to be zero dollars. You cannot just

pick the employer stock and then leave the rest has to be all of it together in

one lump sum distribution for that year. – Okay, no more interruptions. Now you’re

going to go back and you’re going to give us an example. – Okay, yes. So, let’s say we’re

going to stick with IBM. Let’s say you retire from IBM and you’re 65 And your IBM 401

(k) balance is $800 ,000 and you have that situation where some of its employer

stock, some of it is just other mutual funds or whatever else you have going on in

your 401 (k). So, at the $800 ,000 balance, let’s say $100 ,000 is IBM stock in

particular. So, we call up IBM’s 401 (k) custodian, let’s say it’s Fidelity and we

ask them, “What is the cost basis of the IBM stock in this 401 (k)?”

The cost basis is going to be the value of the stock when you purchased it

initially in your 401 (k) or if it was like a profit sharing from your employer,

then the cost basis is whatever the value was at the time that you received that

stock. So, we call Fidelity, and they tell us that your cost basis of the IBM shares

in your 401 (k) is $40 ,000. So, it’s $100 ,000 value, $40 ,000 is cost basis.

That means there’s about a $60 ,000 embedded gain in just that IBM stock.

So, in order to pursue the net unrealized appreciation, what we would have to do is

send the $100 ,000 of IBM stock to a brokerage account. The other $700 ,000 balance

in the 401k has to go to an IRA. So, two different accounts, two different

distributions, but we’ve gotten all $800 ,000 out of the 401k, which is a

requirement. Like I said, it has to be a total distribution in that year. And then

the advantage that we’re going to receive as part of this anyway, is that, like I

said, the $40 ,000 cost basis that’s going to the brokerage account, that is taxable

as ordinary income in the year of the transfer. So that’s important to be aware of

and to be prepared for, but the advantage I should say now is the $60 ,000 gain,

instead of being treated as ordinary income is now going to be taxed as long -term

capital gains whenever it is that you choose to sell the stock. You do not have to

immediately sell the stock, you can just keep holding it in that account until you

want to sell it or need to sell it for income. So, it separates instead of the

entire $100 ,000 of employer’s stock being taxed as ordinary income, like it would if

you were to just go the traditional route and go to an IRA. It separates the

cost basis being taxes ordinary income and the gain now being taxed at the lower

Long -term capital gains rates which is essentially what we’re after by doing this

anyway, is getting the long -term capital gains Treatment on the gain of the employer

stock Okay, so let’s continue this example and let’s just go down that

math and let’s say let’s just do a hypothetical on what my tax would look like

doing this. Let’s just give it a real example of what my tax burden would look

like on this. – Yes, okay, so let’s start with, let’s say we just go traditional

route. We take the entire 401k balance; we send it to an IRA. Let’s say you’re

going to take a $100 ,000 distribution and I’m just going to say, let’s put you in the 22

% marginal tax bracket. So that means if you take a $100 ,000 distribution out of

your IRA, you’ll pay a 22 % federal tax. That’s $22 ,000 federal tax bill.

So, keep that in mind. In comparison to if we go this NUA route,

like I said, the $40 ,000 cost basis is now going to be taxed as ordinary income.

So that will be taxed at the same 22 % rate. That’s $8 ,800, $22 % of $40 ,000 cost

basis, but the $60 ,000 gain that was on the IBM stock will now be treated as a

long -term capital gain and taxed at 15%. So, 15 % of $60 ,000 is $9 ,000.

So, when we pursue this NUA route, we have partial ordinary income, partial long term

capital gains, total federal tax bill is around $17 ,800.

So that’s the goal is to get the $17 ,800 NUA route tax bill lower than the

traditional and just going straight to the IRA, not looking at NUA at all. Right.

So, in your example, and it really, I think comes down to education and kind of

understanding that this rule even exists and then understanding whether or not you

qualify. But in your example, if you aren’t aware of it or and you just move it

to the IRA and you take the hundred, you pay 22 ,000 in taxes that year on the

distribution. Whereas if you did it the NUA route that you’re explaining, you used

to pay 17, eight or almost 18 ,000. So, and all our savings on just having knowledge

around this particular strategy.

So, to go back, so first you kind of say, hey, do I qualify? Do I have stock in

my 401K that’s publicly traded? And then you say, do I want to do this to get

this long -term capital gains treatment? But now the qualifier is, am I ready to do

this in the sense of, am I able to afford adding on what would be the basis of my tax

 returns, and in your example, the $40,000 of additional income, to accomplish the NUA,

 then you have justify is it worth it to get the capital gains treatment on a portion of the

 money. Yes, exactly! That’s a few things to think through and I would think most would

 want to have a conversation with a tax person or a financial

planner that understands NUA. But yeah, so let’s walk through the goals of this and

when do you do it? When do you not do it? What scenarios do you think of? – Yeah,

exactly. So of course, you have to make sure that you qualify. And like I said, the

goal is to pay the lowest tax rate possible. In that example where the IBM stock

was sold and the long -term capital gains rate was paid on the gain,

you don’t have to sell the stock immediately. I was just saying, in that example,

just for the sake of trying to get to the Apple’s-to-Apple’s comparison, we sell the

stock. But I just want to be clear, you can keep holding that stock for as long

as you want. So, when it is worth pursuing is when your cost basis is low in

comparison to the total value of your company stock. If in that example,

the IBM stock, again, we have $100 ,000 and our cost basis was like $85 ,000, $90

,000, you’re going to have to pay ordinary income on the $85 ,000 or $90 ,000, whatever

the cost basis is. And then the remainder being the long -term capital gains. If the

long -term capital gains portion is not the majority of that value, then it’s going

to be more difficult to justify paying the ordinary income on the cost basis in

comparison. So, it definitely needs to be a conversation, of understanding

what the tax implications are, what is the cost basis of that stock in comparison

to the total value, and if the cost basis is low enough to make it worth it,

that’s really what this decision turns on.

And then it’s not required, but kind of related to that, it would be ideal if in

the year that we do this anyway distribution, your other income was low,

so that you could be in a low ordinary income tax bracket to justify, again, that

tax bill that you will have on the cost basis of the employer stock. So, if it’s

going to put you into a high tax bracket, then it’s possible it’s not even going

to be worth pursuing. Or if it’s a situation where you don’t even, you just don’t

want to pay the tax bill on the ordinary income, then maybe we don’t pursue it

either. So definitely the taxes need to be discussed and paired for to make the

decision on how it’s going to be best to pursue or not. Excellent.

So yeah, I’ll go ahead. Yeah. I was just going to say one last thing is getting

the employer stock out of your 401k because it’s now in a brokerage account.

Brokerage accounts do not have required minimum distributions where traditional IRAs

do. So just one other advantage to doing NUA is that you’re not adding even more

to your 401k and IRA balances, you’re taking that out and that takes that employer

stock out of the equation for your requirement of distributions later on as well. So

that can be an advantage. But again, I would say the bigger piece is what the

consequences are going to be in the year that the distribution is taken. Okay,

excellent. So, I just kind of want to sum this up. I think that the goal of what

we wanted to do today is to let people know if you have stock in your 401K,

have a conversation about whether or not the NUA applies, well, whether or not you

should employ it, let’s say it that way, it applies to you, but whether or not you

should employ it, can you employ it, is it worth it? So basically, just saying,

“Hey, let’s just do an analysis on it and say, “does it make sense?” That way

you’ve made an educated decision because what you don’t want to do is move your 401k,

then find out about net unrealized appreciation and go, my goodness, should I’ve have done

it? And it doesn’t really matter the answer cause we’ve already done it. So, let’s

don’t beat ourselves up, but we just want to make sure that we, hey, if we address

this ahead of time, you get to make the decision. It’s going to be, you know,

you’re, you’re making an educated decision. And, and that’s what we want. So, if you

were working with us as our firm, Taylor’s going to do that analysis. And she’s

going to like, hey, here’s the numbers, does it make sense? Yes or no, you get to

make an educated decision. So, thank you very much, Taylor, for coming on. We love

having you come on and you explain the most riveting things. And anyway, so no,

it is something that we need to know about. And so, we appreciate you coming on and

explaining a topic that it can be complicated, especially to be listening to here.

But by the way, just on that point, if We’ve listened to this and you’re like,

what? I can’t remember all these numbers, couple things. Keep in mind, we do have a

blog that is written on this topic, so it’ll have all those numbers and examples in

it, so don’t worry about that. And then we also have a lot of show notes if you

go to our podcast page. So, we’ll have it all laid out there for you. Thank you very much, Taylor, we appreciate it