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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Are You Middle-Class? Here's the Most Tax-Friendly State for Your FamilyTax Tips We found the state with no income tax, low property tax bills and exemptions on groceries and medicine.
-
Social Security Benefits Quiz : Do You Know the IRS Tax Rules?Quiz Social Security benefits often come with confusing IRS tax rules that can trip up financially savvy retirees and near-retirees.
-
How Are I Bonds Taxed? 8 Common Situations to KnowBonds Series I U.S. savings bonds are a popular investment, but the federal income tax consequences are anything but straightforward.
-
Capital Gains Tax Quiz: How Well Do You Really Know IRS Investment Tax Rules?Quiz Take our capital gains tax quiz to test your investment taxes knowledge. Learn about loss rules, holding periods, and tax incentives that could impact your savings.
-
6 Tax Reasons to Convert Your IRA to a Roth (and When You Shouldn't)Retirement Taxes Here’s how converting your traditional retirement account to a Roth IRA can boost your nest egg — but avoid these costly scenarios.
-
Could Tax Savings Make a 50-Year Mortgage Worth It?Buying a Home The 50-year mortgage proposal by Trump aims to address the housing affordability crisis with lower monthly mortgage payments. But what does that mean for your taxes?
