ESOP – NUA

“If one does not know to which port one is sailing, no wind is favorable.”

- Seneca

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Navigating Concentrated Positions of Employer Stock in a Company Retirement Plan

Complex financial decisions require a broad range of financial expertise. At CORE, our clients gain access to our entire team. This means you will benefit from the knowledge and experienced counsel of Certified Financial Planner™ (CFP®), Certified Public Accountant (CPA), Personal Financial Specialist (PFS™), and Chartered Retirement Plan Specialist (CRPS®) team members.

We provide a broad resource base to guide you through the decision-making process as you approach retirement. Employees with concentrated positions in employer/company stock in 401(k)s or Employee Stock Ownership Plans (ESOPs) encounter unique risk and many detail-intense options, including an involved tax strategy known as Net Unrealized Appreciation (NUA).

A lifetime of accomplishment

Perhaps you sought out your company as a young professional specifically for the benefits package. Owning a piece of the company and personally experiencing the benefits of growth have made you feel invested in your company's success. Your company has done well, and so have you.

Retirement is approaching. Decisions need to be made, but questions remain.

I’ve heard about NUA, but what does it entail?

How do taxes affect my bottom line?

Will I incur penalties if I retire before a certain age and start drawing funds from the account?

You have options for your employer stock when you’re ready to leave the company.

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Leave stock in the company plan (if permissible by your former employer).

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Complete a direct rollover to an Individual Retirement Account (IRA) and defer your tax.

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Sell the stock, pay the ordinary income tax due on the proceeds, and pay penalties if you are under the age of 59 ½.

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Implement a tax strategy known as Net Unrealized Appreciation (NUA).

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How does NUA work?

NUA is an often overlooked tax strategy that could have significant tax savings if utilized correctly.

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NUA by definition is the difference between the cost basis (purchase price) and the current fair market value (FMV) of the stock.

Upon electing the NUA strategy, the employee receives the stock, pays ordinary income tax (and penalty if under age 59 ½) on the average cost basis of the stock. The shares can then be sold any time and will be taxed at (typically more favorable) long term capital gains rates.

Is NUA right for you?

It may be if...


There is a significant difference in the stock value over the cost basis.

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Your funds are needed in a shorter time horizon.

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You are currently in a higher tax bracket and can benefit from the long-term capital gain rate treatment.

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Case Studies

Click the button below
to see the full case study

Executive
retiring at
52 yrs old.

Supervisor
retiring at
58 yrs old.

See Case Study 1

Executive
Retired at 52

 

See Case Study 2

Supervisor
Retired at 58

Steps to a Successful NUA


Start early – the process takes time.

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Allow ample time to gather the right documents. You must obtain written documentation from your employer indicating your cost basis. You also need to notify your employer if you plan to utilize the NUA strategy (for tax reporting purposes).


Determine your gain.

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As a general rule, you will only want to use the NUA strategy on shares that have a low-cost basis and have significantly appreciated in value. You can choose which shares you want to designate for NUA tax treatment.


Know your tax liabilities.

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Make a plan to meet your tax obligations by April 15th of the year following your taxable withdrawal.


Have a strategy for your concentrated position.

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Consider the stock’s future potential rise (or fall) in value, your overall asset allocation, and the risk of continuing to hold a concentrated position.


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Do I qualify for NUA treatment?

You MUST meet all conditions

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You must distribute all assets from the plan.

You cannot leave any balance in the plan.


You must distribute your entire vested balance out of the plan in the same calendar year.

The process takes time, therefore it is not suggested you wait until the end of the year.


You must take the distribution of company stock as actual shares.

You may not convert them to cash prior to the distribution.


One of the following must be experienced:

  • Separated from service
  • Reached age 59 1⁄2
  • Total Disability
  • Death

Secure futures are built on a series of intentional decisions.

Our team partners with you to navigate the complexities of your financial portfolio.
We’re with you every step of the journey.

If you’d like to see if you could benefit from the NUA strategy, let's talk.

Cautionary Statement

The decision to utilize NUA can be complicated and you should consider not only taxes but also your overall financial condition. The information contained in this presentation is designed to give a general overview of the NUA rules and is not an endorsement or recommendation to utilize NUA.