Employer Stock Inside a 401(k): NUA Cross-Border Planning

NUA stands for net unrealized appreciation.

In simple terms, it is the increase in value of employer securities while they are held inside a qualified retirement plan.

NUA planning can be relevant when someone holds employer stock inside a 401(k) or similar employer plan and is considering a lump-sum distribution, in-kind stock distribution or IRA rollover.

A review should usually consider:

• whether the plan holds employer securities
• whether the employer stock is inside a qualified retirement plan
• whether the stock has a low cost basis
• whether there is significant unrealized appreciation
• whether a lump-sum distribution is available
• whether the plan can distribute shares in-kind
• whether the entire plan balance must be distributed in the same tax year
• whether the person has separated from service
• whether the person has reached an eligible triggering event
• whether an IRA rollover would lose NUA treatment
• whether ordinary income tax applies to the stock cost basis
• whether the NUA may be taxed later when the shares are sold
• whether withholding applies
• whether local tax applies
• whether the person is tax resident outside the United States
• whether concentrated employer stock risk is acceptable
• whether the stock should be held, sold or diversified
• whether the person may return to the United States later

IRS Publication 575 says that if you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer tax on the net unrealized appreciation in the securities.

IRS Topic 412 also says that if a lump-sum distribution includes employer securities and Form 1099-R reports an NUA amount in box 6, the NUA is generally not subject to tax until the securities are sold.

The planning point is important.

If employer stock is rolled into an IRA without reviewing NUA first, a potential planning opportunity may be lost.

A standard 401(k) rollover is often sensible.

But employer stock can change the analysis.

If a 401(k) contains employer securities with significant unrealized appreciation, rolling the shares into an IRA without review may remove the ability to use NUA treatment.

That does not mean NUA is always the right strategy.

It means the choice should be deliberate.

A proper review should compare:

• keeping the 401(k) where it is
• rolling the full plan to an IRA
• distributing employer stock in-kind
• rolling non-stock assets to an IRA
• selling employer stock inside the plan
• selling employer stock after distribution
• diversifying gradually
• using other assets for liquidity
• coordinating with tax and local advice

The decision can depend on:

• the stock’s cost basis
• the current market value
• the level of unrealized gain
• the person’s ordinary income tax rate
• expected capital gains treatment
• US withholding
• local tax where they live
• whether foreign tax credits are available
• whether the stock is too concentrated
• whether they need retirement income
• whether they are comfortable holding single-stock risk
• whether they may return to the United States later
• whether beneficiaries live abroad

For expats, the cross-border layer matters.

A strategy that looks tax-efficient in the United States may be less attractive if the country of residence taxes the distribution, sale or gains differently.

The best answer is not:

Always use NUA.

Nor is it:

Always roll over to an IRA.

The best answer is:

Model the NUA, rollover, sale, tax, concentration and currency position before taking action.

This page is for general information only and does not constitute personalised financial, tax, legal, investment, pension, retirement, rollover, NUA, employer stock, securities, withholding, estate planning, US tax, local tax or currency advice.

Employer stock, employer securities, NUA, cost basis, unrealized appreciation, lump-sum distributions, in-kind distributions, 401(k) rollovers, IRA rollovers, ordinary income tax, capital gains tax, withholding, local tax, foreign tax credits, treaty treatment, concentration risk, provider access, beneficiaries, currency and future residence depend on personal circumstances and may change.

US tax advice should be taken from a suitably qualified US tax adviser or CPA. Local tax, legal, pension, retirement plan and estate planning advice should also be taken where relevant.

Financial planning should be coordinated with tax, legal, pension, investment, retirement and estate planning advice where appropriate.

Do not roll over, distribute, sell, retain or restructure employer stock inside a 401(k) without reviewing tax, investment, concentration, plan rule, provider, withholding, local tax and currency implications.

Investing involves risk. Employer stock, retirement account, pension and investment values can fall as well as rise, and you may get back less than you invest.

Single-stock concentration can materially increase portfolio risk.

Currency movements can affect the value of employer stock, retirement accounts, withdrawals, transfers, tax liabilities and future spending.