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NUA Mini-Series - Part 1 - Distribution Options, Ep 29

Today's episode of the Equity Compensation Guidebook is the start of another mini-series. I did one before and the responses were positive so I thought I would do another. Plus, this is a great way for me to dive deeper into an equity compensation-related topic. These can be complex topics and my choices are to do a long episode or break the topic into manageable parts. My philosophy is to keep these episodes well under 30 minutes. Why? As a child of the '80s, I learned everything can be solved in a 30min sitcom episode. I figure that applies to podcasts too, right? I covered the generalities of what net unrealized appreciation or NUA is in episode 28 so if you haven’t already, go check that one out! And if you have, thanks! 

You will want to hear this episode if you are interested in...

  • Don’t be an NUA guinea pig [1:30]
  • The rollover Individual Retirement Account [2:55]
  • The lump-sum [4:08]
  • When to consider an NUA [5:33]
  • Saving big when you utilize an NUA [6:14]
  • This week’s FLASHBACK [8:51]

Don’t be an NUA test dummy

NUA is an advanced financial planning technique. It also easily falls into the world of advanced tax planning but I believe it has more to do with financial planning since there are so many moving parts and it is almost entirely related to retiring. My point is if you are considering whether to go the NUA route, be sure to talk to a certified financial planner who knows the ins and outs of NUA. This is too complex for you to be a guinea pig for a CFP who has never done one before. If it goes wrong, well, you both learn something. Unfortunately, it may be much more costly for one party versus the other. 

Why should I bother with the NUA?

The NUA is for highly appreciated company stock. It is not for your regular old 401k. If your company stock is in a tax-deferred retirement plan and is highly appreciated then the NUA allows you to do a lump sum and it recognizes ordinary income on the base and the appreciation comes out as long-term capital gains.

What's the big deal? Well, the top tax rate for ordinary income right now is 37% and the top for capital gains is 20%. A quick example: You have a million dollars worth of company stock in a qualified retirement plan. It’s never been taxed. The company contributed $200k of stock and it’s grown by $800k. If you did a normal lump sum, that’s $1 million subject to 37% and possibly another 3.8% Medicare surcharge. That’s potentially over $400,000 you pay in taxes. With the NUA the base of $200k would pay out $74k in taxes, at 37%. But the $800k of appreciation is taxed at 20%, so $160k in taxes. This brings your total to $234k via the NUA approach. I don't know about you, but to me, this seems to be a much better deal than paying over $400,000 in taxes. And that Medicare surcharge... does not apply to NUA!

This week’s FLASHBACK: Laughs from the Lake Erie Railroad

You may recall I shared a story previously about trying to make songs with the steam whistle and how an engineer and I were almost fired. That engineer and I had another funny story, we actually have a few, but this one is safe to share.

There were some pictures (old school printed photos) someone had taken from a party and as we were going around the loop the engineer decided he wanted to look at them. As the engineer, you actually did have to pay attention to what you were doing. You always had to have a literal hand on things, So I would hand him a photo, he would look at it and then hand it back. One photo must've needed more sunlight to study it in greater detail and he put it just outside the window of the locomotive. Unfortunately, it flew out of his hand. Since it was someone else's photo he decided right then on a plan to get it back. Now, common sense would say just walk the train tracks after our shift and pick up the photo, but there isn't a whole lot of common sense when it comes to college-age males. Instead, on our next pass, he kept an eye out for it and then suddenly told me to take over. He hopped out of the train, waited for the train to pass, picked up the photo, and then hauled butt to catch back up. If you could have seen the looks on the faces of the riders, it was hysterical!

 Resources & People Mentioned

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.