What is Net Unrealized Appreciation (NUA) and should I use it for my Eastman stock?
Quick Answer
NUA allows you to pay long-term capital gains tax instead of ordinary income tax on the appreciation of Eastman stock in your ESOP or 401(k). This can save you 10-20% in taxes on the growth. The strategy makes sense when your stock has significant appreciation, you're in a high tax bracket, and you can execute a proper lump-sum distribution. It's not right for everyone, the decision depends on your specific numbers.
NUA is one of the most powerful tax strategies available to Eastman employees, but it's also one of the most misunderstood.
What NUA actually is:
When employer stock appreciates inside a retirement plan, that growth is called Net Unrealized Appreciation. Normally, all retirement distributions are taxed as ordinary income. NUA is an exception that lets you pay capital gains rates on the appreciation portion.
The math that matters:
Ordinary income rates: 22%, 24%, 32%, or higher depending on your bracket Long-term capital gains rates: 0%, 15%, or 20% depending on your income
That's a potential 10-20% tax savings on every dollar of appreciation.
Who should consider NUA:
- Significant appreciation in Eastman stock (the bigger the spread between cost basis and current value, the better)
- You're in a higher tax bracket (24%+)
- You have the ability to take a lump-sum distribution
- You can handle the cash flow of paying some tax upfront
- You don't need to sell the stock immediately (though you can)
Who should NOT use NUA:
- Low appreciation relative to cost basis
- You're in a low tax bracket now and expect to stay there
- You need all the money in tax-deferred accounts for estate planning
- The stock represents too much concentration risk for your situation
The execution requirements:
- Must be a lump-sum distribution (entire account balance in one tax year)
- Must follow a triggering event: separation from service, death, disability, or reaching age 59½
- Must be employer securities (Eastman stock specifically)
- Must actually take the stock out, you can't sell it inside the plan and claim NUA
What happens after:
Once the stock is in your taxable brokerage account: - Sell immediately: Pay capital gains tax on the NUA portion - Hold and sell later: Original NUA is still long-term capital gains; any additional appreciation is short or long-term depending on holding period
This is the kind of decision that can save or cost $50,000+ over a retirement. Get the numbers run before you commit.
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