Company Stock and NUA

What special tax treatment is available for employer company stock held in a qualified employer retirement plan such as a 401k or 403b?

For qualifying 401k and 403b distributions, if the taxpayer elects to deposit employer company stock in a taxable account rather than IRA rollover the company stock, the participant will pay tax in the year of distribution on the purchase price of the employer company stock bought in the qualified retirement plan.

If the fair market value of the stock on the date of distribution exceeds the purchase price, the difference, called net unrealized appreciation (NUA), will be taxed as long-term capital gain when the stock is sold.

As an example or company stock and capital gains tax:

If the employer company stock was purchased by the plan over the years for an average price of $10 a share, and the fair market value is $50 at the time of the distribution, the NUA is $40.

When shares of the company stock are later sold in a taxable account, the NUA on the stock while it was in the retirement plan is automatically treated as if the participant held the stock for more than 12 months and, under current law, will incur long term capital gains tax. Click here to read more about Capital Gains Tax..

Any capital gains realized since the date of 401k or 403b distribution from the employer retirement plan in excess of the NUA is taxed at the capital gains tax rate applicable to the holding period from the distribution date to the sale date.

Using the example above, assume the shares are sold six months after distribution at $55. You will have a $40 long-term capital gains (the NUA) and a $5 short-term capital gains.

• NUA - Net Unrealized Appreciation 
• Lump Sum Distribution or LSD
• NUA and 401k Rollover