Net Unrealized Appreciation (NUA): The Million-Dollar Rollover Mistake
Net Unrealized Appreciation (NUA): The Million-Dollar Rollover Mistake
CORE INSIGHTS
- The Trap: Defaulting to an IRA Rollover converts appreciated company stock into “Ordinary Income” (37% tax). NUA lets you pay 20% Capital Gains tax instead.
- The Spread: By paying tax only on the Cost Basis now, you liberate the appreciation from future income taxes. The 17% spread is instant alpha.
- One Shot Rule: You must distribute the stock in-kind to a brokerage in a single “Lump Sum” tax year. Rolling it to an IRA first kills the benefit forever.
Most retirees operate on autopilot: “Retire -> Roll to IRA.” If you hold company stock, this “prudent” advice is malpractice. NUA is the tax code’s hidden gift to loyal employees.
Standard Rollover: 100% Taxed at Ordinary Rate (37%).
NUA Strategy: Cost Basis (Ordinary) + Growth (LTCG 20%).
*Savings: 17% Federal + 3.8% NIIT on the appreciation.
What-If Scenario: $1M Stock ($100k Basis)
| Strategy | Tax Rate | Total Tax Bill |
|---|---|---|
| IRA Rollover | 37% (Ordinary) | $370,000 |
| NUA Strategy | Mixed (37% + 20%) | $217,000 |
Visualizing the Wealth Destruction
*Figure 1: Tax Liability. NUA (Green) keeps $153k more in your pocket than Rollover (Red).*
Strategic Action Steps
Do not let the administrator cut a check for the whole balance. You must instruct a “Split Distribution.”
Move Company Stock shares to a Taxable Brokerage. Move the rest (mutual funds) to an IRA.
You owe tax on the Cost Basis ($100k) this year. Pay it from outside funds. Do not sell the stock to pay the tax.
The Bottom Line: Who Should Choose What?
- Execute NUA: If Cost Basis is < 30% of Market Value. The lower the basis, the higher the leverage.
- Skip NUA: If Basis is high (little growth) or you expect your tax bracket to drop to 10-12%.
Frequently Asked Questions
Why is rolling over to an IRA a mistake?
Because an IRA converts all future withdrawals into ‘Ordinary Income’ (max 37%). NUA allows you to pay tax only on the cost basis now, and 20% Capital Gains on the growth later.
What is the trigger requirement?
You must execute a ‘Lump Sum Distribution’ (entire account balance cleared in one tax year) after a triggering event like separation from service or age 59½.
When does NUA beat a Rollover?
If the Cost Basis is less than 30% of the Market Value, NUA usually wins. If basis is high, the upfront tax outweighs the benefit.