woman sitting on chair near tent

In order to understand just how NUA can be used, it is helpful to understand qualified accounts that this tax trick can be used in and how they differ in tax treatment compared to non-qualified accounts. Qualified accounts (i.e. Traditional 401(k)) are designed to offer individuals added tax benefits. In a qualified account you can make contributions with pre-tax dollars from your income, which lowers your tax bill for that year. 

 

"Qualified accounts (i.e. Traditional 401(k)) are designed to offer individuals added tax benefits." red and gray tents in grass covered mountain

 


In addition, no tax is paid on appreciation until withdrawals are made. At the point withdrawals are made (tax penalty for withdrawals before 59½ and required minimum distributions [RMDs] after 70) both appreciation and invested amounts are taxed as ordinary income.

 

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On the other hand, non-qualified plans are those (i.e. a standard brokerage
account) that are not eligible for tax-deferral benefits. Investments are paid
for with after-tax dollars. When appreciated shares are liquidated (a gain is
“realized”), the difference between cost basis (original cost at purchase) and sales price is taxed at either short-term or long-term capital gains rate depending on how long they were held, in addition to taxes paid on dividends the year they are received. Funds from non-qualified accounts are neither subject to early withdrawal penalties nor RMDs.

 

For more information about this topic, view our e-book here: https://retirekit.theretirementgroup.com/net-unrealized-appreciation-ebook-offer


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