Getting Money out of Your 401(k) without Paying Taxes and Penalties

When leaving a company to start a new job, figuring out what to do with your 401(k) account from your prior employer is one of the top priorities from a financial planning standpoint. Financial Advisors typically recommend rolling the balance of your old 401(k) over into a traditional IRA, as this strategy allows you to have both a higher degree of control over the funds, as well as much more flexibility in regards to what investment vehicles you can utilize within the account.

While this is typically a sound strategy, there is another option to consider if you own shares of your previous employers’ stock within your 401(k). This rule, called Net Unrealized Appreciation (NUA), may allow you to distribute these shares of company stock out of your 401(k) and directly into a taxable investment account; the only penalty charged being income tax on the cost basis of these shares. This strategy allows you to have access to your shares of company stock, without triggering the same level of tax penalty that would typically be charged for such a premature distribution from a retirement account.

For folks at public companies with large amounts of their prior employers stock in their 401(k), NUA can offer a material tax advantage - especially if the stock has been held for a long time and has appreciated substantially. If the company stock is sold out of the taxable account later on, the NUA shares will be subject to capital gains tax, which could be significantly lower than your current income tax rate.

For those that it applies to, NUA offers an opportunity to access their previous employers stock now with a fraction of the tax penalty applied, and should be considered if you are transitioning companies.

If you have recently switched companies or are considering doing so and have questions about how NUA might pertain to your 401(k) account, please feel free to reach out to our team and we would be happy to advise.