NUA Distribution Strategy

The changes in the 2003 tax legislation, which increased the spread between ordinary income and capital gains tax rates, is a compelling reason to look at the benefits of Net Unrealized Appreciation (NUA) under Section 402(e) of the Internal Revenue Code.

By using a NUA strategy, executives can take a distribution of employer stock from their qualified plan and pay ordinary income tax only on their basis at the time of distribution, allowing for continued tax deferral on the balance of their stock. The difference between the basis and the fair market value at distribution-the net unrealized appreciation-is taxed at a long-term capital gains rate when the stock is sold, regardless of the holding period. Subsequent appreciation (earned after the distribution from the qualified plan) is taxed at short-term or long-term capital gains rate according to length of holding period.

Distributions from retirement plans and IRA’s are taxed at ordinary income tax rates. In working with our clients, customization of each plan is critical in determining the different strategies when using NUA.