NUA is a way to extract money invested in your company's stock held in your company 401(k). It allows you to pull the entire company stock out of the plan, while receiving special tax treatment. You'll pay ordinary income tax on the basis and have more favorable long-term capital gains on the growth through the years.
For example, if you purchased company stock for $50,000 and now it's worth $150,000, you would pay the ordinary income-tax rate on the $50,000 of basis, as well as long-term capital gains on the $100,000 of growth. Yet if you pulled the stock out of the 401(k), you would pay ordinary income tax on the entire $150,000.
More from Straight Talk:
Here are the top female portfolio managers in the US
Why understanding asset allocation is key
Nearly every financial plan written has been wrong: Advisor
It's best to work with a professional before attempting the NUA process on your own, because there are a lot of moving parts and potential pitfalls. Here are some critical things to know before you even begin using this type of strategy.
1. A 'qualifying event' is required to be eligible.
A qualifying event is classified as separation from service, attaining age 59½, death or disability.
2. Withdrawals from your 401(k) in between qualifying events makes you ineligible.
For example, if you are 62 years old and took some funds out of your 401(k) two years ago, you cannot use this strategy. The only caveat here is if you attain a new qualifying event. Then you have the option of resetting. Therefore, if you separated service and took money out at 58 years old, you can still do the NUA once you reach age 59½ (another qualifying event).
3. You must withdraw the full amount of your 401(k) in the same calendar year.
This doesn't mean you can't take a portion of these funds and roll it into an IRA while utilizing NUA for the company stock. This just needs to occur in the same calendar year. For example, if you have $1,000,000 in your 401(k) and $250,000 is company stock and $750,000 is in mutual funds, you could take the $250,000 and move it to a brokerage account. Then you can perform the NUA and roll the $750,000 into an IRA.