Name: Saint Paul & Minnesota Foundation
Address: 101 5th St E Suite 2400, Saint Paul, MN, 55101, US
Telephone: 651.224.5463
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Help your clients retire smarter by leveraging their net unrealized appreciation with their donor advised fund.

By Mariah Brook, Director of Gift Planning

Net Unrealized Appreciation (NUA) is a powerful tax strategy that is often overlooked. This special technique is designed to help employees greatly reduce tax on the appreciation of employer stock held in their retirement plan.

Here’s an example of how this strategy works.

Maria’s Retirement Plan Story

Maria has worked for a Fortune 500 company for many years and is getting ready to retire at the age of 62. She met with a financial advisor to begin designing a retirement income plan. Her advisor noticed that Maria owned 5,000 shares of the corporation’s stock in her 401(k) plan. They explained to her that by utilizing the NUA strategy, she could significantly minimize her income taxes in the future. After hearing the details, Maria agreed it was the right strategy for her.

In Maria’s year of retirement, she transferred all shares of the corporation’s stock from her 401(k) to a non-qualified brokerage account and rolled the rest of her plan assets into an IRA.

Normally, a distribution from a qualified retirement plan to a non-qualified account would result in ordinary income tax on the entire value of the assets transferred, but the NUA strategy gives Maria a special advantage. Instead, she recognizes ordinary income only on her basis in that corporation’s stock (not the appreciated value). She avoids paying tax on the net unrealized appreciation of the stock at the time of the transfer to the brokerage account.

The assets that Maria rolled into an IRA are not taxed at the time of transfer. Future distributions from the IRA will be 100% taxable at her ordinary income tax rate.

The assets in her non-qualified brokerage account will be taxed at capital gain rates when she sells them in the future – not ordinary income tax rates as they would if she’d rolled them into her IRA.

	5000 shares XYZ Corp	Taxable Amount
With NUA	($12 basis/share x 35%)	$60,000
Without NUA	($38 FMV/share x 35%)	$190,000

Utilizing NUA to Make a Gift to a Donor Advised Fund

The NUA strategy creates some taxable income in the year Maria retires; therefore, it is an ideal time for her to consider a significant charitable contribution.

She donates 750 shares of the corporation’s stock with the lowest basis from her non-qualified brokerage account to a donor advised fund. That provides her with a charitable income tax deduction on the fair market value of the stock.

She also sells some of the corporation’s stock with the highest basis and reinvests the proceeds in other stocks to diversify her portfolio. The charitable deduction helps off-set both the capital gains tax triggered by the NUA strategy and the sale of that stock.

Combining NUA and a DAF for Tax Savings

	No NUA or DAF	NUA Only	NUA + DAF
Tax on Corporate Stock	(5000 x $38/share) $66,500	(5000 x $12/share) $21,000	(5000 x $12/share) $21,000
Charitable Gift	n/a	n/a	750 shares = $28,000
Charitable Deduction Tax Savings	$0	$0	($28,000 x 35%) -$9,975
Net Tax	$66,500	$21,000	$11,025
Tax Savings		68% Tax Savings	83% Tax Savings

Going forward, Maria will use the assets in her donor advised fund to recommend grants to her favorite nonprofits instead of writing checks from her personal account.

This way, she will be able to continue giving during retirement at the same level or greater. She receives the income tax charitable deduction now when it is most beneficial to her and distributes grants to charities of her choice over time.

NUA Fine Print

Net unrealized appreciation is a very powerful strategy, but there are some requirements outlined in IRC Section 402(e)(4) that must be followed.

All employer stock must be distributed in-kind to the non-qualified account.
All assets in the plan must be distributed lump sum.
The lump sum distribution must be made at the time of a triggering event, including death, disability, separation from service, or reaching age 59 ½.

Everyone holding their company’s stock in their employee retirement plan should consider NUA to see if it is right for them. It can significantly reduce taxable income immediately and in the future.

Financial advisors should be aware of this strategy and be ready to share it with clients who can benefit. If NUA is not utilized and all retirement assets are rolled into an IRA, there is no going back.

You don’t have to be an expert on every charitable giving technique to provide your clients with a high level of service. Our gift planners will work alongside you to help your clients achieve their charitable goals. We can help your clients create their giving plan and identify organizations that do great work and align with causes they care about most. You can even continue to manage the assets in your client’s DAF through our individually managed funds program.

The Saint Paul & Minnesota Foundation offers a wide variety of charitable funds to choose from. Staff at the Foundation can serve as an extension of your client’s team. To learn more, contact our team today via email philanthropy@spmcf.org or by phone at 651.224.5463 to find out how we enhance your client relationships and build your practice with philanthropic planning.

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The Saint Paul & Minnesota Foundation does not provide tax, legal or accounting advice. Please consult your own tax, legal and accounting advisors regarding your individual situation before engaging in any transaction.

As Director of Gift Planning at the Saint Paul & Minnesota Foundation, Mariah Brook helps individuals and families initiate and express their philanthropic plan to maximize their giving. In her role, Mariah also provides nonprofits the support to start and grow their endowments and works alongside professional advisors to help them achieve their client’s philanthropic goals.

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