The tax break provided for net unrealized appreciation (NUA) on 401(k) account distributions once provided a powerful tax savings strategy for clients with large 401(k) balances — allowing some clients to reduce their taxes on these retirement funds by as much as 20 percent.
Today, as high-net-worth clients are increasingly seeking strategies to help minimize their tax burdens in light of higher 2013 tax rates, the NUA strategy may have become more complicated than ever. Therefore, it’s important for advisors to help clients evaluate whether or not the NUA strategy still works, because for some clients, what was once a significant tax-savings strategy might be gone in 2013 — especially for those who are newly subject to the 3.8 percent investment income tax.
NUA considerations today
Today, the ordinary income tax rate for high income clients has increased from 35 percent to 39.6 percent — but the top long-term capital gains rate has also increased, from 15 percent to 20 percent. Taken alone, these rate hikes would seem to preserve the benefits of the NUA strategy — but the additional 3.8 tax on net investment income requires closer consideration.
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