Heirs Can Use NUA Tax Break for Inherited 401(k)s
This tax-saving move will result in more money in your pocket if you inherit employer stock.
Workers who have a stash of employer stock in their 401(k)s can make use of a tax-saving move known as net unrealized appreciation, or NUA. But this tax-saving move is also available to heirs who inherit 401(k)s that hold employer stock, IRA expert Ed Slott recently noted at his IRA workshop in National Harbor, Md.
Here’s how the NUA strategy works: Say a deceased worker had employer stock in his 401(k) with an original cost basis of $100,000 and a current value of $500,000. If the heir rolls assets from the 401(k) to an inherited IRA, she can split off the appreciated employer stock and roll that into a taxable brokerage account.
The heir will owe ordinary income tax on the original cost basis. When she later sells the appreciated stock from the taxable account, the NUA—the difference between the cost basis and the current market value of the employer stock—will be taxed at long-term capital-gains tax rates. Note that the heir doesn’t get a step-up in basis on the appreciated employer stock.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If instead she rolls the appreciated employer stock into the inherited IRA along with the rest of the 401(k) assets, she’ll owe ordinary income tax on all the withdrawals, including the employer stock. And that would be a costly move tax-wise.
Her total tax bill at today’s top rates using the NUA strategy would be $117,000—$37,000 on the original cost basis at a 37% top ordinary income rate and $80,000 on the $400,000 of NUA at the top capital-gains rate of 20%. If she doesn’t use the NUA strategy, at a 37% top ordinary rate, she’d owe tax of $185,000—or $68,000 more.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
'Instant' EV Tax Credits Are a Hit: $580M Paid This Year
EV Credits Claiming federal electric vehicle tax credits at the point of sale is a new and popular option in 2024.
By Kelley R. Taylor Last updated
-
Retirees Face Significant Tax Bills Due to Fraud
Fraud A new report sheds light on how older adult scam victims end up with big tax bills and lost retirement savings.
By Kelley R. Taylor Last updated
-
Tax Day: Is the Post Office Open Late?
Tax Filing Tax Day means some people need to mail their federal income tax returns.
By Kelley R. Taylor Published
-
High Earners: Beware of These Illegal Schemes to Lower Taxes
Tax Schemes The IRS says high-income filers are targets for several illegal tax schemes.
By Katelyn Washington Last updated
-
Mailing Your Tax Return This Year? What to Know Before You Do
Tax Filing There are plenty of reasons not to mail your tax return this year, but here’s what you should know if you are.
By Katelyn Washington Last updated
-
IRS Warning: Beware of Smishing and 'Helper' Tax Scams
Scams Tax season is a time to look out for email and text message scams.
By Kelley R. Taylor Last updated
-
Most Expensive States to Live in for Homeowners
Property Taxes High property tax bills make the places on this list the most expensive states for homeowners to live in.
By Katelyn Washington Last updated
-
Don’t Miss This $2,500 Tax Break for Paying Your Student Loan
Tax Deductions Do you qualify for the student loan interest deduction this year?
By Katelyn Washington Last updated