Net Unrealized Appreciation (NUA) is a special tax strategy available when an employee distributes employer company stock from a qualified retirement plan (e.g., 401(k)) as part of a lump-sum distribution.
How NUA works: - When employer stock is distributed from the plan, only the cost basis (what the plan paid for the stock) is taxed as ordinary income. - The appreciation (the NUA — the difference between FMV at distribution and cost basis) is taxed at the lower long-term capital gains rate — even if the stock is sold immediately.
Example: - Cost basis of employer stock in 401(k): $20,000 - FMV at distribution: $100,000 - NUA: $80,000
Without NUA strategy: Roll over to IRA → all $100,000 eventually taxed as ordinary income (up to 37%). With NUA strategy: Take in-kind distribution → $20,000 taxed as ordinary income now; $80,000 NUA taxed at 0%/15%/20% long-term capital gains rate.
Requirements: - Must be a lump-sum distribution (entire vested balance distributed in one tax year). - Must be a triggering event: age 59½, separation from service, disability, or death. - Stock must be employer securities (your company's stock, not just any stock in the plan).
When NUA is advantageous: - High NUA relative to cost basis. - High ordinary income tax rate vs. capital gains rate. - Need the funds now (not deferring into rollover IRA).
> Exam tip: NUA = ordinary income on cost basis only; NUA itself taxed at capital gains rates. Must be a lump-sum distribution. Not beneficial if the employee is in a low tax bracket. Tested on CFP® and EA Part 2.