April 18, 2025 • 30 mins
Do I need to know about NUAs? - Andy Ives, CFP®, AIF® from Ed Slott and
Company joins Chris Boyd and Jeff Perry for an interesting conversation about Net
Unrealized Appreciation (“NUA”). NUAs are a powerful tool for people having
employer stock in company plans. The discussion digs into how the gains from an
employer stock program can be distributed according to the NUA rules and be subject to
long term capital gain taxes. Andy shares the “triggering” events of when the rules apply,
and common mistakes people make.
For more information or to reach TEAM AMR, click the following link:
https://www.wealthenhancement.com/s/advisor-teams/amr
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified Financial Planner Practitioner
and Senior Vice President and Financial Advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to another episode of Something More with
Chris Boyd.
I'm Chris Boyd.
I'm here with Jeff Perry, and we want
to welcome our guest, Andy Ives.
(00:43):
He is from the Ed Slott & Company.
He's one of the and company, I guess.
Andy, you and your team do such a
great job with the IRA help that you
provide.
Ed Slott, of course, is such a great
wealth of information for so many years, but
(01:05):
you all do such a great job and
love having you as a guest.
Thanks for being with us.
Yeah, thank you.
Happy to be here.
I've been enjoying the program you guys put
on for advisors.
It's funny.
You think you know a lot about this
stuff.
Until you actually get into the weeds that
(01:30):
you guys produce so much depth of content,
I had no idea all that I didn't
know, of course.
But it's been a great education and I
think it enhanced my professional skills.
I really appreciate that.
You want to talk about Ed Slott &
Company and all that you guys do?
Well, that's good to hear.
(01:51):
I hear that from a lot of our
member advisors.
We've got about 500 members across the country.
These are advisors that are looking to extend
their educational knowledge base with IRAs and retirement
plans.
When we do our programs, anybody can come
to a two-day program and basically they
drink from a firehose.
We hammer them with as much information as
(02:12):
possible and they come away saying exactly what
you just said.
I didn't know what I didn't know.
So if they're looking to become a member,
they're certainly welcome to do so.
But yeah, keep an eye out for Ed
Slott programs across the country.
We do a couple a year and a
virtual one each year.
Even if you come to the two-day
meeting, you'll walk away with a great manual
and a ton of new information.
(02:33):
That's so true.
I just did a refresher on that because
it did just so much content.
I think I got more out of it
the second time than I did the first.
One of the things that you talked about
was what we want to talk about today,
and that was NUA.
(02:55):
I keep coming across this recently, just it
had come up a few times.
So maybe it was more on my radar
after our going through this again recently, but
it's the kind of thing I've been familiar
with.
I've run across over the years, but there's
some details and nuances and things to be
aware of.
(03:15):
And I just thought this would be a
really great episode for our listeners.
And by the way, I'd be willing to
bet whether you're a professional or a novice,
you probably have seen Ed Slott on PBS
or something like that.
So you're familiar with the kind of expertise
and information on IRA information we get.
(03:36):
So, Andy, let's talk about what is an
NUA?
Let's start with that.
Yeah.
Well, Net Unrealized Appreciation.
So NUA stands for Net Unrealized Appreciation, and
it is becoming more and more popular.
I do present in our manual that I
do present the NUA section.
(03:59):
And I always ask when I go on
stage, and there'll be like 350 advisors there
from across the country.
And I always ask who here has done
an NUA transaction for a client.
And over the years, more and more hands
have gone up.
So it is definitely becoming more and more
prevalent.
But basically what it is, it's a tax
strategy that can help reduce the taxes paid
(04:21):
on company stock and the appreciation of company
stock that you might hold within your work
plan, like a 401k.
So this is for, let's say a company,
someone who's participated in a company plan and
the employer says, and if you want, you
can buy our stock basically.
Right.
And so they have not only money set
(04:44):
aside for retirement, but specifically in their company
stock.
There, we talk about as advisors, oftentimes the,
some of the hazards of that, you know,
lived through the Enron era and all that
kind of thing where people can have too
(05:05):
many eggs in one basket with their income
and their wealth.
So it's always a good idea to keep
a limit to how much, but in any
event, let's assume you have this opportunity and
you've had this commitment to kind of buy
your company.
So now what are some triggering events that
(05:27):
could sort of give someone this opportunity to,
in essence, maybe you should, instead of the
events, we should talk about what can you
do?
What's the virtue of this NUA process?
How is it advantageous?
Yeah, absolutely.
And you're right.
I agree with you on the whole concentrated
securities thing.
You know, we always preach diversification is key,
(05:48):
but you know how real life works.
A lot of people just plow as much
money as they can into their 401k and
they just buy their company stock or they
buy the actual stock or they buy a
stock fund.
You can do this with a stock fund
as well.
But the way it works is this.
I was a good, I was going to
ask you about that.
I'm glad you mentioned that.
Yeah.
So that's one for sure.
We can talk about that in a little
more detail of how that works later on.
But I like to explain it by saying,
(06:09):
what would happen if you didn't do NUA?
So let's say hypothetically a person has, they
bought a million dollars of company stock in
their 401k over their years of buying this
company stock.
And let's say that their cost basis, the
amount that they paid for those shares over
the years, the average cost basis was $200
,000.
(06:30):
And their appreciation over all those years is
$800,000.
If this person did not pursue NUA, they
were never told about it.
Their financial advisor didn't know about it.
And they just went their business.
They would probably at some point roll the
401k into an IRA after they retired, the
million dollars in stock would go over to
the IRA.
(06:50):
And then over time they would sell and
withdraw it.
And ultimately as they took that money out
of the account or the IRA, they would
pay ordinary income tax on the full $1
million.
And they would be blind to any benefits
that they might've had.
Typical case, right?
Typical case.
If that person had had a knowledgeable financial
advisor, like one of you guys, and that
person was told about NUA, what they could
(07:13):
have done was with the NUA strategy, paid
long-term capital gains on the 800,000
and ordinary income on only the 200,000
of cost basis.
So that is the NUA strategy in a
nutshell, the tax benefit in a nutshell.
It's the spread between paying ordinary income on
(07:35):
the $800,000 or long-term capital gains
on the $800,000.
That difference can lead to tens and even
hundreds of thousands of dollars in tax savings.
People probably understand this, but sometimes we think,
oh, capital gains, that's unappealing.
But in reality, what you just described is
(07:57):
advantageous because capital gains are always less than
income tax.
So that's the desire.
Now, one of the things that comes to
my mind is what if I don't necessarily
want to pay the tax on a million
dollars or just $800,000, $200,000 at
(08:18):
one time?
What if I only wanted to deal with
some portion of it?
Right, right.
That's a good question.
Yeah.
So I went through basically the science of
NUA, the math.
This is the fixed numbers.
But there is an art to applying NUA
called the art of NUA.
And that's identifying the tipping point where it
(08:40):
makes sense for a client.
I've had situations where we'll use the same
numbers, where a person said, I can't afford
the tax hit on a $200,000 distribution
from my 401k.
Is there any way we can massage that?
You could do a partial NUA distribution.
Let's say this person says, I can only
afford the tax on $100,000 now.
(09:01):
You could take half of those shares and
take half of those shares out of the
account and only pay ordinary income on $100
,000.
And then you would have $400,000 of
appreciation that you would, quote, unquote, that you
would NUA.
Now the other shares, the other half of
those shares, if you roll those over to
your IRA, you will never be able to
do NUA on those shares.
(09:22):
So that opportunity is lost.
So this is only at the time of
the transfer.
That's right.
So let me back up a little bit
as far as if you wanted to do
the NUA transaction, how does it work?
This person that's got this million dollars in
their 401k, they've probably got some other mutual
funds in cash, et cetera.
To qualify for an NUA distribution, the stocks,
(09:43):
the company stock are transferred in kind out
of that 401k into a regular non-qualified
brokerage account.
That's the distribution from the plan.
Everything else that remains in that plan, whether
it's the half the shares or the funds
or the cash or whatever, typically gets rolled
over to an IRA.
You have to empty the 401k.
(10:04):
It's a lump sum distribution.
You're basically cashing out of that 401k.
Non-NUA stock goes to an IRA.
NUA shares are transferred into a non-qualified
brokerage account.
That's your distribution.
That triggers the taxable payout.
And that's where you have the ordinary income
due in the year of the distribution.
(10:25):
So the year that you do this NUA
transaction, you do have to pay the taxes
on ordinary income on the cost basis.
The appreciation, that NUA, in this case, we're
talking about the $800,000, that capital gains
payment tax is not due until the shares
are sold.
You do not have to hold it for
a year.
So if you want to sell in a
week, great.
If you want to hold it for a
(10:45):
couple of years, go for it.
But you've locked in long-term capital gains
on that appreciation.
So that person who says, gee, I'm not
sure I really can afford that.
They have that option though.
They could certainly sell some shares.
They'd have some capital gains in the experience
as well.
But that may be part of that equation.
Now, if they opted to do this, just
(11:07):
in this hypothetical, someone said, oh, I'm going
to take half of those shares or whatever.
Can they come back next year and take
the other half?
They would not.
That's a good question.
And this is where people get sideways sometimes.
I talk about this lump sum distribution.
When you want to pursue an NUA transaction,
you've got to get it all done in
one calendar year.
So whatever shares I want to take, if
(11:28):
I do them all, if I do half,
those go to my non-qualified brokerage account.
The rest of that account, the lump sum
distribution has to go to my IRA or
be paid out or whatever.
It's got to come out of the 401k.
If there's stuff left over in that account
the following year, you can't leave shares there
to NUA again the following year because that
would disqualify the lump sum distribution requirement.
(11:51):
So it would basically nullify your original NUA
distribution.
So good question.
You can't do the other half the following
year.
Don't try to get too cute.
No, I will say, because I've seen this
happen before, sometimes dividends will trickle into the
account the next year, or maybe the company
will make a profit share contribution earlier than
next year.
(12:11):
Those will not disqualify the lump sum distribution.
Any contributions that go into the account for
the previous year when you did your NUA
distribution, don't worry about those.
Those aren't going to ruin the lump sum
distribution qualification.
Right.
So maybe now we could go talk about
what are the occasions?
When do I have this opportunity to start
thinking about these kinds of opportunities?
(12:34):
Yeah, that's important because not everybody can just
raise their hand and say, I want to
do NUA.
You have to hit what we call trigger
events.
And there's only four of them.
One of them is age 59 and a
half.
59 and a half, once you hit it,
that's a trigger.
I like to think of it as your
light goes on.
Your NUA light is on, you're now eligible.
(12:55):
You don't have to jump right away.
You don't have to do the NUA distribution
in the year you turn 59 and a
half.
Just recognize that your light is now on
and then it'll stay on for years until
you activate it.
And we'll talk about activating the light.
But 59 and a half is one.
Separation from service is another.
Disability, only for the self-employed.
(13:16):
And then death.
So really the ones that we see are
59 and a half and separation from service.
And then if that person doesn't proceed with
NUA on either one of those occasions, their
beneficiaries would have the opportunity based on the
death trigger.
Yeah.
Which none of us are hoping for that.
Right.
All right.
So these are big occasions.
(13:42):
And what could disrupt my, turn off my
light, as you put it?
So I may not say I'm going to
take that stock or take a rollover or
lump sum.
Necessarily, I might be still working at 59
and a half.
Maybe there's plenty of good income and I
don't want that tax yet, as an example.
(14:05):
So you said that can stay on, that
there's an opportunity to continue.
I could do that at 62 now, perhaps,
right?
What could disrupt that?
Yeah.
And that's where, again, people don't realize that
their actions have consequences.
So if I'm working and I've got this
million dollar stock in my 401k and I
(14:27):
turn 59 and a half, my NUA light
is on and it's going to stay on.
And then a couple of years later, I
haven't done anything with my account.
I haven't made any changes to the account.
Then a couple of years later- Make
your additions, your money going in every week
or whatever it is.
Still participating like normal, getting my company match
and making my salary deferrals.
Maybe I reallocate a little bit with some
of the mutual funds.
(14:47):
I'm not really doing anything egregious with my
account.
That's not allowed.
That's not a problem.
Yeah.
It's all good to go.
But if let's say now I'm 62, 63,
my NUA light is still on because of
my 59 and a half trigger.
And I say, I need to take a
couple of dollars out because I want to
take the family on vacation.
I'm still working.
My 401k allows in-service distributions.
(15:10):
I take $10,000 out.
That transaction will, what I like to think
of, makes my NUA light start to flash.
I've activated it by doing this distribution.
Now I do have to go now.
I've got to do my NUA transaction in
that calendar year when I activated that light.
(15:32):
If I don't- In that case of
the withdrawal, like you described, a distribution, it's
not necessarily that it has to sequentially be,
oh, I take the stock distribution first.
It just has to be done in that
same calendar year, you're saying.
That's right.
That's right.
So if your light is on and if
you do it, take a distribution or where
(15:53):
some people get sideways, even if you do
an in-plan Roth conversion, it's basically when
you generate a taxable event, a distribution, an
in-plan conversion, that is what activates that
NUA light.
So if I take this distribution in January,
February, March, I've got some time.
I've got a few months here to get
this NUA transaction done.
(16:14):
If I don't act on that, then at
the end of the year, 1231, my NUA
light, based on that 59.5 trigger, goes
out.
So if someone inadvertently, unaware of this NUA
opportunity, happened to take an in-service withdrawal
because they needed cash, is 59.5 the
(16:37):
key there?
If they did it at 58, it's okay.
Didn't disqualify them.
But if they did it after, unaware, after
59.5, it's not okay?
That's a good question.
Yeah.
And that's accurate.
Basically, the stuff you did prior to that
trigger is not going to hurt you.
So once you hit that trigger and the
light comes on, now is when we're looking
at your transactions.
(16:59):
And inadvertent is a good word because that's
what we see a lot of times.
People make inadvertent moves, not understanding the consequences,
and they ruin their NUA opportunity.
But it's not the end of the world.
This person that turns 59.5 hits the
trigger, and then does an in-plan conversion,
isn't aware of what they do.
They inadvertently activate it, and then they don't
(17:20):
act on that light.
Right.
Three years later.
Right.
If they then separate from service a few
years later, their trigger light goes back on.
So NUA is going to be available at
that point again.
Just for clarity, for those who might not
have heard that term separate from service, essentially,
that's just retire, leave the employer, move to
(17:41):
a different employer.
Just essentially, you're no longer an active participant
in the plan, essentially, because you've left that
employer for one reason or another.
Accurate?
Exactly.
100% accurate.
And I've had that question.
I had a person that worked at a
company.
They had good company stock.
They separated from service.
(18:02):
They left that company, and they left the
401k money there.
They left the stock there, et cetera.
They did take a job at another firm.
So they weren't retired.
They were still working, but they had separated
from service from that original company.
So they didn't lose the opportunity to do
NUA because they took another job.
They were separated from service.
And also- Oh, sorry, go ahead.
(18:23):
No, I was going to say, when you
do the NUA transaction, you can leave the
money.
Once you've left that company and your trigger
light goes on, when you ultimately process your
NUA distribution, if you were staying at that
company, if you didn't leave the company, if
you were acting on your 15 and a
half trigger, if you do still work, because
you can do this while you're still working,
(18:44):
you cannot continue to participate in that plan.
That's an important note.
That's a big note.
Yeah.
It's a big note.
So you said earlier about, I hit my
15 and a half trigger.
I'm still putting money into the plan.
I don't want to proceed with this yet.
That is probably a wise move because like
we just said, once you do NUA and
(19:06):
you do the lump sum, you have basically
cashed out and you cannot go back into
that plan.
That's a great caveat to know.
Yeah.
That's a significant detail.
So now this other situation, the gentleman or
woman who moved to another company.
So they've separated from service, the trigger light
is on and they decide, well, instead of
(19:31):
having the 401k here, the 401k there, maybe
I'll roll this thing over.
That's when they have to make this decision,
right?
About don't just bring all that money over
and lose that opportunity.
You can take advantage of pulling out the
stock at its basis.
Exactly.
Because if that person that has left the
(19:53):
company, if they proceed with a rollover and
they roll all their 401k into an IRA,
they have eliminated the opportunity to do NUA.
You can't move that company stock into the
IRA and then do the NUA distribution.
The stock must be transferred out in kind
from the 401k directly to a non-qualified
(20:14):
brokerage account.
And then everything else can go to your
IRA.
Very good.
And you mentioned stock funds can also participate
in this program.
Can you explain that?
Yeah.
So with a stock fund, when you leave
your company, they will typically just convert that
(20:35):
stock fund into actual shares.
So they just take however much money you
have in your stock fund divided by the
share price, the current share price for the
stock, and then they will go ahead and
distribute those shares.
So yes, you can certainly do it with
a stock fund when they convert that to
shares.
You can do it with private stock.
You can do it from an ESOP plan.
So there's a lot of flexibility as far
(20:56):
as where that stock is coming from and
the type of stock.
Very good.
So Andy, again, we're talking with Andy Ives
of the Ed Slotin Company.
What's the calculus that should go into this?
How do I decide if it's a good
idea or not?
I would think, hey, capital gains is less
(21:18):
than income tax.
Shouldn't this be a no-brainer or is
it more complicated than that?
Well, again, that gets back to the art
of NUA and it's identifying that tipping point.
We say that NUA doesn't make sense unless
you have quote-unquote highly appreciated company stock.
Well, highly appreciated to me might not mean
(21:39):
highly appreciated to you.
Any delta could make it worthwhile, but is
it really worth going through all the activity
you're saying?
That's right.
I've had people call and say they had
a $25,000 cost basis and the value
(21:59):
of the stock was $50,000.
So 25,000 appreciation.
When you do the math, capital gains on
that versus ordinary income, maybe there'll be a
couple of thousand dollars tax savings.
Is it worth it to that person to
proceed?
I've seen other ones where- A job
even holder, so to speak.
Exactly.
Now, if this same person called and they
(22:20):
had a $25,000 cost basis and the
value of the stock was 500,000, that
in my mind would make sense to pretty
much anybody that you want to proceed with
that.
But again, identifying that tipping point where it
makes sense.
Interestingly, it couldn't even make sense if there
was a penalty involved.
And I'll give you an example.
Let's say a person was only 50 years
(22:41):
old and they had been working at a
tech company or something that the stock has
just rocketed it up.
And I'll use the same example from the
beginning when I said $200,000 basis and
$800,000 of appreciation.
They're 50 years old, they leave that company.
So they've separated from service, trigger event, the
light goes on.
(23:01):
That person could do NUA.
If they did the NUA transaction, they're only
50.
So it would be a distribution from their
plan, they're under 59 and a half, there's
going to be a 10% penalty.
The 10% penalty only applies to the
cost basis.
So in that situation, there would be a
penalty if they did a full distribution in
(23:23):
the 200,000 of $20,000.
But would that be worth it to get
long-term capital gains on the $800,000
for ordinary income?
So again, that's where you get into the
art of NUA.
Does it make sense?
Does it make sense to pay the tax?
How high an income they have and how...
Exactly.
So there's definitely some mathematical equations that can
(23:45):
be done, which you can ballpark it.
You can say, all right, capital gains is
this, ordinary income is this.
And you can get an idea of what
the tax savings would be.
Yeah.
Yeah, absolutely.
All right.
So that's the kind of thing that you're
a good advisor will help you navigate as
you go through this.
What are some of the things we should
be thinking about when we talk about NUA?
What are the other considerations that people should
(24:08):
be aware of?
Well, there is...
So a couple of things.
I will say that...
So if a person is eligible for NUA
and they've got a good NUA opportunity and
they proceed with the NUA distribution, so now
they've got this company stock has been sent
out of their 401k and is now in
their non-qualified regular brokerage account.
As I said, they're going to pay ordinary
(24:28):
income on the cost basis now.
They will pay long-term capital gains on
the NUA, that appreciation that occurred within the
plan, long-term capital gains no matter when
they sell it.
If they hang on to those shares, there
could certainly be additional appreciation after the money
came out of the 401k.
I call this an NUA parfait as far
(24:49):
as the tax.
You can picture the parfait with the layers.
So the bottom layer is the ordinary income
tax on the basis now.
The second layer is long-term capital gains
on the appreciation when you sell it.
And then the third layer is any appreciation
after distribution.
That appreciation will also get long-term capital
gains treatment, but it has to be held
(25:11):
for a year.
So when you take it out of the
plan, any additional appreciation is going to be
long-term, but only if held for a
year.
A good problem to have.
Yeah, a good one to have, for sure.
It is a good problem to have.
Don't wait the year you're dealing with income
tax rates or short-term capital gains on
(25:35):
the gains since the distribution you're saying.
Exactly, that additional appreciation.
So that's one thing to be aware of
that impacts most people.
There's an interesting nuance to NUA, which I've
seen it a couple of times and it's
a function of record keeping.
So there's something called specific identification method where
(25:57):
I've been talking about examples of a $200
,000 average cost basis, et cetera, $800,000
appreciation.
If the plan or if the person, the
participant keeps very good records, you can NUA
specific shares.
So if you're buying shares at the markets
doing this over your career, you can NUA
(26:19):
the low cost shares and not NUA the
high cost shares.
So if you have a record of when
you bought these specific shares, you can pick
and choose.
Well, that brings me to one of the
questions I was going to ask.
What if it's the inverse?
Your million dollars has gone down in value.
It's gone down $200,000 and it's worth
(26:41):
$800,000.
Would I even consider this?
Well, you wouldn't consider it if you didn't
have any appreciation, but I will say that
you can reset your cost basis.
And we've seen some whiplash in the markets
here recently.
If I have a decade before I'm going
(27:01):
to retire, let's say, before I'm going to
possibly hit a trigger and I've been buying
company stock and now my company stock, my
average cost basis is let's say $40 and
the company stock was at $70, but now
it has tanked for whatever reason.
And now the price per share is down
to $30.
I could sell everything and buy it back
(27:22):
at $30.
There's no wash sale rule within a 401k.
So you can go ahead and reset your
basis.
Now you're going to have to spend some
time waiting for that to come back up,
but it is a way to take advantage
of a market downturn.
I actually just wrote an article about this
just last couple of days, which will be
in our next newsletter, talking about some opportunities.
(27:44):
Could be an opportunity.
Your timing's right and you want to hold
the stock.
We've seen a lot of volatility in the
market recently.
Is there any strategy that someone should be
thinking about?
That might be one example.
Yeah, certainly that resetting your cost basis is
definitely one.
The opposite can be true.
We all know that when you've got these
(28:06):
whiplash volatility in the market, some people lose
sleep over that.
You could have what is a very good
annual opportunity after years and years of buying
company stock, but then a person says, I
just can't sleep with all this volatility and
they sell their company stock.
They sell it within the plan.
They just eliminated the opportunity to do annual
(28:26):
in the future.
So panic selling certainly could be in the
long run a bad, bad decision.
Andy, this has been great.
Love getting all this information.
Thank you.
I think this is one of those topics
that advisors are familiar with, but it's good
(28:47):
to go over some of this and really
understand how it works.
And for consumers, they may not even be
aware of it.
So it's great to have the opportunity to
share this along the way.
So if you have a retirement plan where
you've got company stock, pay attention, share this
(29:07):
with others.
If you've got others you know in your
family or friends who might have, co-workers
might have this kind of thing, share the
podcast so they may benefit from it as
well.
Andy Ives, thanks for being with us as
our guest.
Anything you want to plug for Ed Slott?
When's the next opportunity?
It sounds kind of complicated, but it's not
(29:28):
really that terrible.
As you just said, if you have a
company slapping your plan, certainly be aware of
it.
And if you want to proceed with any
way transaction, just call the plan.
Say, listen, I want to do this.
They'll typically have some paperwork for you to
fill out.
They know about it.
They will walk you through the step.
Let them hold your hand and you could
save a ton of money in taxes.
Until next time, everybody keeps striving for something
(29:48):
more.
Thank you for listening to Something More with
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll free at 866
(30:09):
-771-8901 or send us your questions to
amr-info at wealthenhancement.com.
You're listening to Something More with Chris Boyd,
and
I'll
(30:40):
see you next time.
Welcome to Something More with Chris Boyd.
Chris Boyd is a Certified Financial Planner Practitioner
and Senior Vice President and Financial Advisor at
Wealth Enhancement Group, one of the nation's largest
registered investment advisors.
We call it Something More because we'd like
to talk not only about those important dollar
and cents issues, but also the quality of
life issues that make the money matters matter.
(00:22):
Here he is, your fulfillment facilitator, your partner
in prosperity, advising clients on Cape Cod and
across the country.
Here's your host, Jay Christopher Boyd.
Welcome to another episode of Something More with
Chris Boyd.
I'm Chris Boyd.
I'm here with Jeff Perry, and we want
to welcome our guest, Andy Ives.
(00:43):
He is from the Ed Slott & Company.
He's one of the and company, I guess.
Andy, you and your team do such a
great job with the IRA help that you
provide.
Ed Slott, of course, is such a great
wealth of information for so many years, but
(01:05):
you all do such a great job and
love having you as a guest.
Thanks for being with us.
Yeah, thank you.
Happy to be here.
I've been enjoying the program you guys put
on for advisors.
It's funny.
You think you know a lot about this
stuff.
Until you actually get into the weeds that
(01:30):
you guys produce so much depth of content,
I had no idea all that I didn't
know, of course.
But it's been a great education and I
think it enhanced my professional skills.
I really appreciate that.
You want to talk about Ed Slott &
Company and all that you guys do?
Well, that's good to hear.
(01:51):
I hear that from a lot of our
member advisors.
We've got about 500 members across the country.
These are advisors that are looking to extend
their educational knowledge base with IRAs and retirement
plans.
When we do our programs, anybody can come
to a two-day program and basically they
drink from a firehose.
We hammer them with as much information as
(02:12):
possible and they come away saying exactly what
you just said.
I didn't know what I didn't know.
So if they're looking to become a member,
they're certainly welcome to do so.
But yeah, keep an eye out for Ed
Slott programs across the country.
We do a couple a year and a
virtual one each year.
Even if you come to the two-day
meeting, you'll walk away with a great manual
and a ton of new information.
(02:33):
That's so true.
I just did a refresher on that because
it did just so much content.
I think I got more out of it
the second time than I did the first.
One of the things that you talked about
was what we want to talk about today,
and that was NUA.
(02:55):
I keep coming across this recently, just it
had come up a few times.
So maybe it was more on my radar
after our going through this again recently, but
it's the kind of thing I've been familiar
with.
I've run across over the years, but there's
some details and nuances and things to be
aware of.
(03:15):
And I just thought this would be a
really great episode for our listeners.
And by the way, I'd be willing to
bet whether you're a professional or a novice,
you probably have seen Ed Slott on PBS
or something like that.
So you're familiar with the kind of expertise
and information on IRA information we get.
(03:36):
So, Andy, let's talk about what is an
NUA?
Let's start with that.
Yeah.
Well, Net Unrealized Appreciation.
So NUA stands for Net Unrealized Appreciation, and
it is becoming more and more popular.
I do present in our manual that I
do present the NUA section.
(03:59):
And I always ask when I go on
stage, and there'll be like 350 advisors there
from across the country.
And I always ask who here has done
an NUA transaction for a client.
And over the years, more and more hands
have gone up.
So it is definitely becoming more and more
prevalent.
But basically what it is, it's a tax
strategy that can help reduce the taxes paid
(04:21):
on company stock and the appreciation of company
stock that you might hold within your work
plan, like a 401k.
So this is for, let's say a company,
someone who's participated in a company plan and
the employer says, and if you want, you
can buy our stock basically.
Right.
And so they have not only money set
(04:44):
aside for retirement, but specifically in their company
stock.
There, we talk about as advisors, oftentimes the,
some of the hazards of that, you know,
lived through the Enron era and all that
kind of thing where people can have too
(05:05):
many eggs in one basket with their income
and their wealth.
So it's always a good idea to keep
a limit to how much, but in any
event, let's assume you have this opportunity and
you've had this commitment to kind of buy
your company.
So now what are some triggering events that
(05:27):
could sort of give someone this opportunity to,
in essence, maybe you should, instead of the
events, we should talk about what can you
do?
What's the virtue of this NUA process?
How is it advantageous?
Yeah, absolutely.
And you're right.
I agree with you on the whole concentrated
securities thing.
You know, we always preach diversification is key,
(05:48):
but you know how real life works.
A lot of people just plow as much
money as they can into their 401k and
they just buy their company stock or they
buy the actual stock or they buy a
stock fund.
You can do this with a stock fund
as well.
But the way it works is this.
I was a good, I was going to
ask you about that.
I'm glad you mentioned that.
Yeah.
So that's one for sure.
We can talk about that in a little
more detail of how that works later on.
But I like to explain it by saying,
(06:09):
what would happen if you didn't do NUA?
So let's say hypothetically a person has, they
bought a million dollars of company stock in
their 401k over their years of buying this
company stock.
And let's say that their cost basis, the
amount that they paid for those shares over
the years, the average cost basis was $200
,000.
(06:30):
And their appreciation over all those years is
$800,000.
If this person did not pursue NUA, they
were never told about it.
Their financial advisor didn't know about it.
And they just went their business.
They would probably at some point roll the
401k into an IRA after they retired, the
million dollars in stock would go over to
the IRA.
(06:50):
And then over time they would sell and
withdraw it.
And ultimately as they took that money out
of the account or the IRA, they would
pay ordinary income tax on the full $1
million.
And they would be blind to any benefits
that they might've had.
Typical case, right?
Typical case.
If that person had had a knowledgeable financial
advisor, like one of you guys, and that
person was told about NUA, what they could
(07:13):
have done was with the NUA strategy, paid
long-term capital gains on the 800,000
and ordinary income on only the 200,000
of cost basis.
So that is the NUA strategy in a
nutshell, the tax benefit in a nutshell.
It's the spread between paying ordinary income on
(07:35):
the $800,000 or long-term capital gains
on the $800,000.
That difference can lead to tens and even
hundreds of thousands of dollars in tax savings.
People probably understand this, but sometimes we think,
oh, capital gains, that's unappealing.
But in reality, what you just described is
(07:57):
advantageous because capital gains are always less than
income tax.
So that's the desire.
Now, one of the things that comes to
my mind is what if I don't necessarily
want to pay the tax on a million
dollars or just $800,000, $200,000 at
(08:18):
one time?
What if I only wanted to deal with
some portion of it?
Right, right.
That's a good question.
Yeah.
So I went through basically the science of
NUA, the math.
This is the fixed numbers.
But there is an art to applying NUA
called the art of NUA.
And that's identifying the tipping point where it
(08:40):
makes sense for a client.
I've had situations where we'll use the same
numbers, where a person said, I can't afford
the tax hit on a $200,000 distribution
from my 401k.
Is there any way we can massage that?
You could do a partial NUA distribution.
Let's say this person says, I can only
afford the tax on $100,000 now.
(09:01):
You could take half of those shares and
take half of those shares out of the
account and only pay ordinary income on $100
,000.
And then you would have $400,000 of
appreciation that you would, quote, unquote, that you
would NUA.
Now the other shares, the other half of
those shares, if you roll those over to
your IRA, you will never be able to
do NUA on those shares.
(09:22):
So that opportunity is lost.
So this is only at the time of
the transfer.
That's right.
So let me back up a little bit
as far as if you wanted to do
the NUA transaction, how does it work?
This person that's got this million dollars in
their 401k, they've probably got some other mutual
funds in cash, et cetera.
To qualify for an NUA distribution, the stocks,
(09:43):
the company stock are transferred in kind out
of that 401k into a regular non-qualified
brokerage account.
That's the distribution from the plan.
Everything else that remains in that plan, whether
it's the half the shares or the funds
or the cash or whatever, typically gets rolled
over to an IRA.
You have to empty the 401k.
(10:04):
It's a lump sum distribution.
You're basically cashing out of that 401k.
Non-NUA stock goes to an IRA.
NUA shares are transferred into a non-qualified
brokerage account.
That's your distribution.
That triggers the taxable payout.
And that's where you have the ordinary income
due in the year of the distribution.
(10:25):
So the year that you do this NUA
transaction, you do have to pay the taxes
on ordinary income on the cost basis.
The appreciation, that NUA, in this case, we're
talking about the $800,000, that capital gains
payment tax is not due until the shares
are sold.
You do not have to hold it for
a year.
So if you want to sell in a
week, great.
If you want to hold it for a
(10:45):
couple of years, go for it.
But you've locked in long-term capital gains
on that appreciation.
So that person who says, gee, I'm not
sure I really can afford that.
They have that option though.
They could certainly sell some shares.
They'd have some capital gains in the experience
as well.
But that may be part of that equation.
Now, if they opted to do this, just
(11:07):
in this hypothetical, someone said, oh, I'm going
to take half of those shares or whatever.
Can they come back next year and take
the other half?
They would not.
That's a good question.
And this is where people get sideways sometimes.
I talk about this lump sum distribution.
When you want to pursue an NUA transaction,
you've got to get it all done in
one calendar year.
So whatever shares I want to take, if
(11:28):
I do them all, if I do half,
those go to my non-qualified brokerage account.
The rest of that account, the lump sum
distribution has to go to my IRA or
be paid out or whatever.
It's got to come out of the 401k.
If there's stuff left over in that account
the following year, you can't leave shares there
to NUA again the following year because that
would disqualify the lump sum distribution requirement.
(11:51):
So it would basically nullify your original NUA
distribution.
So good question.
You can't do the other half the following
year.
Don't try to get too cute.
No, I will say, because I've seen this
happen before, sometimes dividends will trickle into the
account the next year, or maybe the company
will make a profit share contribution earlier than
next year.
(12:11):
Those will not disqualify the lump sum distribution.
Any contributions that go into the account for
the previous year when you did your NUA
distribution, don't worry about those.
Those aren't going to ruin the lump sum
distribution qualification.
Right.
So maybe now we could go talk about
what are the occasions?
When do I have this opportunity to start
thinking about these kinds of opportunities?
(12:34):
Yeah, that's important because not everybody can just
raise their hand and say, I want to
do NUA.
You have to hit what we call trigger
events.
And there's only four of them.
One of them is age 59 and a
half.
59 and a half, once you hit it,
that's a trigger.
I like to think of it as your
light goes on.
Your NUA light is on, you're now eligible.
(12:55):
You don't have to jump right away.
You don't have to do the NUA distribution
in the year you turn 59 and a
half.
Just recognize that your light is now on
and then it'll stay on for years until
you activate it.
And we'll talk about activating the light.
But 59 and a half is one.
Separation from service is another.
Disability, only for the self-employed.
(13:16):
And then death.
So really the ones that we see are
59 and a half and separation from service.
And then if that person doesn't proceed with
NUA on either one of those occasions, their
beneficiaries would have the opportunity based on the
death trigger.
Yeah.
Which none of us are hoping for that.
Right.
All right.
So these are big occasions.
(13:42):
And what could disrupt my, turn off my
light, as you put it?
So I may not say I'm going to
take that stock or take a rollover or
lump sum.
Necessarily, I might be still working at 59
and a half.
Maybe there's plenty of good income and I
don't want that tax yet, as an example.
(14:05):
So you said that can stay on, that
there's an opportunity to continue.
I could do that at 62 now, perhaps,
right?
What could disrupt that?
Yeah.
And that's where, again, people don't realize that
their actions have consequences.
So if I'm working and I've got this
million dollar stock in my 401k and I
(14:27):
turn 59 and a half, my NUA light
is on and it's going to stay on.
And then a couple of years later, I
haven't done anything with my account.
I haven't made any changes to the account.
Then a couple of years later- Make
your additions, your money going in every week
or whatever it is.
Still participating like normal, getting my company match
and making my salary deferrals.
Maybe I reallocate a little bit with some
of the mutual funds.
(14:47):
I'm not really doing anything egregious with my
account.
That's not allowed.
That's not a problem.
Yeah.
It's all good to go.
But if let's say now I'm 62, 63,
my NUA light is still on because of
my 59 and a half trigger.
And I say, I need to take a
couple of dollars out because I want to
take the family on vacation.
I'm still working.
My 401k allows in-service distributions.
(15:10):
I take $10,000 out.
That transaction will, what I like to think
of, makes my NUA light start to flash.
I've activated it by doing this distribution.
Now I do have to go now.
I've got to do my NUA transaction in
that calendar year when I activated that light.
(15:32):
If I don't- In that case of
the withdrawal, like you described, a distribution, it's
not necessarily that it has to sequentially be,
oh, I take the stock distribution first.
It just has to be done in that
same calendar year, you're saying.
That's right.
That's right.
So if your light is on and if
you do it, take a distribution or where
(15:53):
some people get sideways, even if you do
an in-plan Roth conversion, it's basically when
you generate a taxable event, a distribution, an
in-plan conversion, that is what activates that
NUA light.
So if I take this distribution in January,
February, March, I've got some time.
I've got a few months here to get
this NUA transaction done.
(16:14):
If I don't act on that, then at
the end of the year, 1231, my NUA
light, based on that 59.5 trigger, goes
out.
So if someone inadvertently, unaware of this NUA
opportunity, happened to take an in-service withdrawal
because they needed cash, is 59.5 the
(16:37):
key there?
If they did it at 58, it's okay.
Didn't disqualify them.
But if they did it after, unaware, after
59.5, it's not okay?
That's a good question.
Yeah.
And that's accurate.
Basically, the stuff you did prior to that
trigger is not going to hurt you.
So once you hit that trigger and the
light comes on, now is when we're looking
at your transactions.
(16:59):
And inadvertent is a good word because that's
what we see a lot of times.
People make inadvertent moves, not understanding the consequences,
and they ruin their NUA opportunity.
But it's not the end of the world.
This person that turns 59.5 hits the
trigger, and then does an in-plan conversion,
isn't aware of what they do.
They inadvertently activate it, and then they don't
(17:20):
act on that light.
Right.
Three years later.
Right.
If they then separate from service a few
years later, their trigger light goes back on.
So NUA is going to be available at
that point again.
Just for clarity, for those who might not
have heard that term separate from service, essentially,
that's just retire, leave the employer, move to
(17:41):
a different employer.
Just essentially, you're no longer an active participant
in the plan, essentially, because you've left that
employer for one reason or another.
Accurate?
Exactly.
100% accurate.
And I've had that question.
I had a person that worked at a
company.
They had good company stock.
They separated from service.
(18:02):
They left that company, and they left the
401k money there.
They left the stock there, et cetera.
They did take a job at another firm.
So they weren't retired.
They were still working, but they had separated
from service from that original company.
So they didn't lose the opportunity to do
NUA because they took another job.
They were separated from service.
And also- Oh, sorry, go ahead.
(18:23):
No, I was going to say, when you
do the NUA transaction, you can leave the
money.
Once you've left that company and your trigger
light goes on, when you ultimately process your
NUA distribution, if you were staying at that
company, if you didn't leave the company, if
you were acting on your 15 and a
half trigger, if you do still work, because
you can do this while you're still working,
(18:44):
you cannot continue to participate in that plan.
That's an important note.
That's a big note.
Yeah.
It's a big note.
So you said earlier about, I hit my
15 and a half trigger.
I'm still putting money into the plan.
I don't want to proceed with this yet.
That is probably a wise move because like
we just said, once you do NUA and
(19:06):
you do the lump sum, you have basically
cashed out and you cannot go back into
that plan.
That's a great caveat to know.
Yeah.
That's a significant detail.
So now this other situation, the gentleman or
woman who moved to another company.
So they've separated from service, the trigger light
is on and they decide, well, instead of
(19:31):
having the 401k here, the 401k there, maybe
I'll roll this thing over.
That's when they have to make this decision,
right?
About don't just bring all that money over
and lose that opportunity.
You can take advantage of pulling out the
stock at its basis.
Exactly.
Because if that person that has left the
(19:53):
company, if they proceed with a rollover and
they roll all their 401k into an IRA,
they have eliminated the opportunity to do NUA.
You can't move that company stock into the
IRA and then do the NUA distribution.
The stock must be transferred out in kind
from the 401k directly to a non-qualified
(20:14):
brokerage account.
And then everything else can go to your
IRA.
Very good.
And you mentioned stock funds can also participate
in this program.
Can you explain that?
Yeah.
So with a stock fund, when you leave
your company, they will typically just convert that
(20:35):
stock fund into actual shares.
So they just take however much money you
have in your stock fund divided by the
share price, the current share price for the
stock, and then they will go ahead and
distribute those shares.
So yes, you can certainly do it with
a stock fund when they convert that to
shares.
You can do it with private stock.
You can do it from an ESOP plan.
So there's a lot of flexibility as far
(20:56):
as where that stock is coming from and
the type of stock.
Very good.
So Andy, again, we're talking with Andy Ives
of the Ed Slotin Company.
What's the calculus that should go into this?
How do I decide if it's a good
idea or not?
I would think, hey, capital gains is less
(21:18):
than income tax.
Shouldn't this be a no-brainer or is
it more complicated than that?
Well, again, that gets back to the art
of NUA and it's identifying that tipping point.
We say that NUA doesn't make sense unless
you have quote-unquote highly appreciated company stock.
Well, highly appreciated to me might not mean
(21:39):
highly appreciated to you.
Any delta could make it worthwhile, but is
it really worth going through all the activity
you're saying?
That's right.
I've had people call and say they had
a $25,000 cost basis and the value
(21:59):
of the stock was $50,000.
So 25,000 appreciation.
When you do the math, capital gains on
that versus ordinary income, maybe there'll be a
couple of thousand dollars tax savings.
Is it worth it to that person to
proceed?
I've seen other ones where- A job
even holder, so to speak.
Exactly.
Now, if this same person called and they
(22:20):
had a $25,000 cost basis and the
value of the stock was 500,000, that
in my mind would make sense to pretty
much anybody that you want to proceed with
that.
But again, identifying that tipping point where it
makes sense.
Interestingly, it couldn't even make sense if there
was a penalty involved.
And I'll give you an example.
Let's say a person was only 50 years
(22:41):
old and they had been working at a
tech company or something that the stock has
just rocketed it up.
And I'll use the same example from the
beginning when I said $200,000 basis and
$800,000 of appreciation.
They're 50 years old, they leave that company.
So they've separated from service, trigger event, the
light goes on.
(23:01):
That person could do NUA.
If they did the NUA transaction, they're only
50.
So it would be a distribution from their
plan, they're under 59 and a half, there's
going to be a 10% penalty.
The 10% penalty only applies to the
cost basis.
So in that situation, there would be a
penalty if they did a full distribution in
(23:23):
the 200,000 of $20,000.
But would that be worth it to get
long-term capital gains on the $800,000
for ordinary income?
So again, that's where you get into the
art of NUA.
Does it make sense?
Does it make sense to pay the tax?
How high an income they have and how...
Exactly.
So there's definitely some mathematical equations that can
(23:45):
be done, which you can ballpark it.
You can say, all right, capital gains is
this, ordinary income is this.
And you can get an idea of what
the tax savings would be.
Yeah.
Yeah, absolutely.
All right.
So that's the kind of thing that you're
a good advisor will help you navigate as
you go through this.
What are some of the things we should
be thinking about when we talk about NUA?
What are the other considerations that people should
(24:08):
be aware of?
Well, there is...
So a couple of things.
I will say that...
So if a person is eligible for NUA
and they've got a good NUA opportunity and
they proceed with the NUA distribution, so now
they've got this company stock has been sent
out of their 401k and is now in
their non-qualified regular brokerage account.
As I said, they're going to pay ordinary
(24:28):
income on the cost basis now.
They will pay long-term capital gains on
the NUA, that appreciation that occurred within the
plan, long-term capital gains no matter when
they sell it.
If they hang on to those shares, there
could certainly be additional appreciation after the money
came out of the 401k.
I call this an NUA parfait as far
(24:49):
as the tax.
You can picture the parfait with the layers.
So the bottom layer is the ordinary income
tax on the basis now.
The second layer is long-term capital gains
on the appreciation when you sell it.
And then the third layer is any appreciation
after distribution.
That appreciation will also get long-term capital
gains treatment, but it has to be held
(25:11):
for a year.
So when you take it out of the
plan, any additional appreciation is going to be
long-term, but only if held for a
year.
A good problem to have.
Yeah, a good one to have, for sure.
It is a good problem to have.
Don't wait the year you're dealing with income
tax rates or short-term capital gains on
(25:35):
the gains since the distribution you're saying.
Exactly, that additional appreciation.
So that's one thing to be aware of
that impacts most people.
There's an interesting nuance to NUA, which I've
seen it a couple of times and it's
a function of record keeping.
So there's something called specific identification method where
(25:57):
I've been talking about examples of a $200
,000 average cost basis, et cetera, $800,000
appreciation.
If the plan or if the person, the
participant keeps very good records, you can NUA
specific shares.
So if you're buying shares at the markets
doing this over your career, you can NUA
(26:19):
the low cost shares and not NUA the
high cost shares.
So if you have a record of when
you bought these specific shares, you can pick
and choose.
Well, that brings me to one of the
questions I was going to ask.
What if it's the inverse?
Your million dollars has gone down in value.
It's gone down $200,000 and it's worth
(26:41):
$800,000.
Would I even consider this?
Well, you wouldn't consider it if you didn't
have any appreciation, but I will say that
you can reset your cost basis.
And we've seen some whiplash in the markets
here recently.
If I have a decade before I'm going
(27:01):
to retire, let's say, before I'm going to
possibly hit a trigger and I've been buying
company stock and now my company stock, my
average cost basis is let's say $40 and
the company stock was at $70, but now
it has tanked for whatever reason.
And now the price per share is down
to $30.
I could sell everything and buy it back
(27:22):
at $30.
There's no wash sale rule within a 401k.
So you can go ahead and reset your
basis.
Now you're going to have to spend some
time waiting for that to come back up,
but it is a way to take advantage
of a market downturn.
I actually just wrote an article about this
just last couple of days, which will be
in our next newsletter, talking about some opportunities.
(27:44):
Could be an opportunity.
Your timing's right and you want to hold
the stock.
We've seen a lot of volatility in the
market recently.
Is there any strategy that someone should be
thinking about?
That might be one example.
Yeah, certainly that resetting your cost basis is
definitely one.
The opposite can be true.
We all know that when you've got these
(28:06):
whiplash volatility in the market, some people lose
sleep over that.
You could have what is a very good
annual opportunity after years and years of buying
company stock, but then a person says, I
just can't sleep with all this volatility and
they sell their company stock.
They sell it within the plan.
They just eliminated the opportunity to do annual
(28:26):
in the future.
So panic selling certainly could be in the
long run a bad, bad decision.
Andy, this has been great.
Love getting all this information.
Thank you.
I think this is one of those topics
that advisors are familiar with, but it's good
(28:47):
to go over some of this and really
understand how it works.
And for consumers, they may not even be
aware of it.
So it's great to have the opportunity to
share this along the way.
So if you have a retirement plan where
you've got company stock, pay attention, share this
(29:07):
with others.
If you've got others you know in your
family or friends who might have, co-workers
might have this kind of thing, share the
podcast so they may benefit from it as
well.
Andy Ives, thanks for being with us as
our guest.
Anything you want to plug for Ed Slott?
When's the next opportunity?
It sounds kind of complicated, but it's not
(29:28):
really that terrible.
As you just said, if you have a
company slapping your plan, certainly be aware of
it.
And if you want to proceed with any
way transaction, just call the plan.
Say, listen, I want to do this.
They'll typically have some paperwork for you to
fill out.
They know about it.
They will walk you through the step.
Let them hold your hand and you could
save a ton of money in taxes.
Until next time, everybody keeps striving for something
(29:48):
more.
Thank you for listening to Something More with
Chris Boyd.
Call us for help, whether it's for financial
planning or portfolio management, insurance concerns, or those
quality of life issues that make the money
matters matter.
Whatever's on your mind, visit us at somethingmorewithchrisboyd
.com or call us toll free at 866
(30:09):
-771-8901 or send us your questions to
amr-info at wealthenhancement.com.
You're listening to Something More with Chris Boyd,
and
I'll
(30:40):
see you next time.
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