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Alert Clients to NUA Tax Benefit October 23, 2007 By Scott Whittemore Do you have any clients that are near retirement and have employer stock in their company retirement plan? If so, you should make them aware of NUA, Net Unrealized Appreciation, a special tax benefit available to employees with company stock in their retirement plan. This benefit allows the employee to distribute the shares out of the plan in a manner that enables the profits to be taxed at capital gains rates. If the shares were just sold in the account and pulled out later as regular distributions, the profits would be taxed at ordinary income rates. For example, if the client had 5000 shares of employer stock worth $50 per share in a qualified stock bonus plan and the original basis of the stock (average cost per share) is determined by the employer to be $5 per share, then our client's stock is worth $250,000 with a tax basis of $25,000. For employees who have spent 20 years or more with the same company, this situation is likely. If the requirements are met, the client could distribute the full $250,000 of stock, in kind, from the plan and pay ordinary income taxes on just the $25,000 of original basis in the year of distribution. The remaining $225,000 of appreciation will not be taxed until she chooses to sell the stock, and then it will be taxed at the maximum capital gains rate of 15%, instead of ordinary income rates. This long-term capital gains treatment is available even if she sells the stock the next day! Compare this to liquidating the stock while it is still in the plan and rolling over the entire balance to an IRA. The full $250,000 would be taxed as ordinary income when it is distributed from the IRA. The federal tax bill for this scenario would be $70,000 assuming a 28% bracket, vs. $40,750 if the NUA approach is taken, a savings of $29,250. This amount of tax savings can be significant for a client trying to retire. It can also build your relationship and credibility with your client. There are specific requirements to be met to take advantage of the NUA. If you need help figuring out if a client qualifies, please call me at (415) 927-8430.

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