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What is Net Unrealized Appreciation (NUA)?, Ep 28

In today's episode of the Equity Compensation Guidebook, I'm following up on a planning topic I mentioned a couple of episodes ago. Net Unrealized Appreciation, better known as NUA in my world. This is a great resource for equity compensation and ESOP participants who have concentrated and highly appreciated stock positions. As always, I do my best to stay high level in these introductory topic podcasts.

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

  • The simple breakdown of an NUA [0:57]
  • Two choices when you take a distribution out of your ESOP [2:19]
  • Other factors to consider with NUAs [3:57]
  • Three steps of taxes [4:53]
  • Four important requirements to take advantage of an NUA [5:52]
  • This week’s FLASHBACK [7:20] 

Is the NUA something you can take advantage of?

The NUA is a powerful but little-known IRS tax break that is advantageous to equity compensation and ESOP owners who have company stock in a tax-deferred setting. It allows you to pay lower capital gains rates instead of higher ordinary income rates.

You have two options when you retire and take a distribution out of your workplace retirement plan. You can roll it into an IRA or you can roll it into an NUA. 

Factors you need to take into consideration with any NUA are tax rates and how much stock appreciation is eligible for NUA. The big final factor to consider is how long before you start the distribution of selling the stock and taking the money out.

Four requirements to take advantage of the NUA

You may be wondering if an NUA is for you so here are the requirements to help you know if you qualify. First, the entire vested balance must be distributed within one tax year. Next, you also have to distribute all assets from all qualified plans that you hold with your employer, even if it only holds company stock. Third, you can not convert the shares to cash before distribution. You have to take the distribution of company stock as shares. Finally, you have to have a qualifying event that's causing you to leave. These events include any of the following, separation from the company, you've reached the age of 59.5, or become fully disabled. 

This week’s FLASHBACK: Useless but inspirational Rocky info

We all remember the Rocky movies from back in the day. What you may not know is that Sylvestor Stalone actually wrote the script himself but no one wanted him to be a part of the film. He felt like it was his baby and wanted to play the lead role. Even under pressure from his agent, he refused to sell the script that everyone wanted. He was offered $360,000 and that was back in the mid-seventies! He said he was used to being poor but he couldn’t live with himself if he sold it and it became a hit for some other actor.

The amazing part is that he was able to get some producers to mortgage their homes and back his attempt at starring in the movie he’d written. The studio had a bunch of restrictions on the film, including a super short period to film it. Do you know how long it took for them to film Rocky? 28 days! And the rest, as they say, is history! 

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.