Suppose your 401(k) retirement plan includes publicly traded company stock? You can save a great deal by paying taxes on that stock now rather than later when you take a dis­tribution. A little known IRS regulation called net unrealized appreciation (NUA) allows you to pull out some (or all) of the shares in the company and separately roll the rest of your account balance over into an IRA. Any increase in the price of the stock (after you have withdrawn your shares and held them for one year) is subject only to long-term capital gains tax, which can be considerably less than ordinary income tax.Put another way, you pay ordinary income taxes on reg­ular IRA distributions assuming you have not yet paid taxes on contributions to the account. Normally, company stock rolled into an IRA is treated the same way. However, if instead of rolling company stock into an IRA, you withdraw the company stock from your 401(k) and transfer it to a tax­able brokerage account; you bypass ordinary income taxes on the NUA of the stock. What exactly is NUA? It is the differ­ence between the value of the company stock at the time it was purchased and put into your 401(k) and the value at the time of distribution, i.e., when it is moved out of your 401(k). Thus, your income tax, in this case, is based on the value of the stock when you first acquired it—not on the current (and presumably much higher) value.Another advantage of the NUA tax break with regard to company stock rollover is that there is no required minimum distribution (RMD) on those assets since they are no longer a part of an IRA.For example, if you own one thousand shares of a com­pany stock with a current value of $100,000 with a cost basis of $25,000, you would have an NUA of $75,000. Should you liquidate the stock and withdraw it, or roll it to an IRA for eventual withdrawal, the entire amount would be subject to ordinary income tax.

Assuming you are in the 30 percent tax bracket, you would owe $30,000 on the $100,000 distribution if taken in a single year.Should you choose to adopt the NUA strategy, however, your tax bill should be much less. If you were to roll the stock, in its entirety, out of your retirement plan all at once into a personal non-IRA account, your current tax liability only lies with the amount you originally invested, i.e., the $25,000. Again, if you are in the 30 percent tax bracket, the current tax due would be only $7,500 ($25,000 x .30). The remaining portion, the $75,000 net unrealized appreciation, is not taxed until you liquidate it. If you hold it for more than one year, it will be taxed at the long-term capital gains rate of 15 percent. Assuming it was sold at current market value, an additional tax of $11,250 ($75,000 x 15 percent) will be due.The tax on the $25,000 of $7,500 together with $11,250 tax equals $19,750 in total taxes. Thus, you save $10,250 by simply doing your paperwork. Not a bad way to start your retirement, don’t you think?Yes, this is a complicated concept and process. By learn­ing about it (and getting help from a financial advisor or accountant), you are likely to save a tremendous amount.

The fact is, in the circumstances described, you cannot afford not to take advantage of the NUA.Caveats: This is a one-time opportunity only. So before proceeding, be certain that the parties involved understand what you are doing. If, for example, your company handles the transfer incorrectly, that could spell trouble. Also, be sure to complete both transactions—withdrawing the stock and rollover to an IRA—in the same year. Otherwise, the IRS could deny you the tax break.Do not—I repeat, DO NOT—attempt to handle this type of transaction on your own. As a rule of thumb, all company stock and option transactions should be handled through a financial advisor. The dollar amounts associated with these transactions are typically large, which means that any mis­takes can be quite costly. Please consult your accountant, HR person, or financial professional for some guidance before you do anything.