retirement

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.

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.

Most Popular

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA
IRAs

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA

Traditional IRAs are set up in a way that basically incentivizes you (and your heirs) into paying the highest tax bill possible. Don’t fall for it. Co…
July 4, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill
Tax Breaks

Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill

Save money next April by making these six hot-as-July tax moves.
July 1, 2022

Recommended

Has Bad Economic News in 2022 Hurt Your Retirement Plans?
retirement

Has Bad Economic News in 2022 Hurt Your Retirement Plans?

How the right plan now can get you back on track and reduce the risk going forward.
July 6, 2022
With High Inflation and an Uncertain Stock Market, Do I Have Enough to Retire?
retirement

With High Inflation and an Uncertain Stock Market, Do I Have Enough to Retire?

If you’re at all concerned then it’s time to do some analysis, either with a financial professional or even just on your own. Answering a few question…
July 6, 2022
Should I Hire an Estate Planning Attorney Now That I Am a Widow?
estate planning

Should I Hire an Estate Planning Attorney Now That I Am a Widow?

Many estates are simple enough where no help is needed, but there are several situations where anyone would be much better off getting some profession…
July 5, 2022
Age Magnificently with the Help of a Geriatric Care Manager
retirement

Age Magnificently with the Help of a Geriatric Care Manager

Geriatric care managers help families map the coming changes and explore the options before they are even needed.
July 5, 2022