How Net Unrealized Appreciation Can Lower Your Taxes

Transcript

If you have company stock that you've purchased within a 401k account, your ear should perk up right now because there's a way for you to save quite a bit of money on so simply stating, if you do have company stock in a 401k, you need to take this NUA treatment- net unrealized appreciation treatment, while it's still in the 401k.

If you apply this treatment to this company stock while it's in the 401k, you can reduce your tax liability by a significant amount. Once you roll this money over when you retire and roll money out of your 401k, say to a rollover IRA account, which most people do, which most people should do but once you roll this out, this company stock, it's too late. You cannot take advantage of this favorable tax treatment. So here's how it works. If you have, you paid $50,000 for that Microsoft stock, it grew to $300,000. If you're in the highest tax bracket and you pull that money out of an IRA account, you're going to pay $111,000 in taxes.

The stock grew to $300,000. You're in the 37 percent tax bracket. That's $111,000 in taxes that you owe. If you apply this NUA treatment while it's in the 401k account, you're able to reduce your tax liability. So you would pay income taxes only on the $50,000 that you invested in your company stock, but all of the growth would be taxed as at long term capital gains tax rates, which if you're in the highest tax bracket is 20%. So 20 percent of this growth to 50 is $50,000. If you're in the highest income tax bracket, 37%, 37 percent of 50 is $18,500. You'd pay a total of $68,500 in taxes. If you apply this NUA treatment to it versus $111,000 in taxes.

So you'd save yourself over $42,000 in taxes by simply knowing that if you own company stock in a 401k, you're able to apply this tax treatment to it, but you have to do it before you roll it over.