Chevron: Saving on Tax Payments with an NUA

Written by Techstaffer | Sep 2, 2023 8:09:14 AM

In my many years of recruiting experience I've realized that taxes have a major impact on people's decision making. It's my job to put people in the best position for them to succeed. I've noticed my Chevron clients in particular are always looking for ways to maximize their tax deductions.

Given the current market we could all benefit from a tax reduction strategy. While I'm not a a tax expert or financial advisor, I have done some research and here's an interesting strategy I thought Chevron employees would appreciate.

Net Unrealized Appreciation (NUA)

When a Chevron employee qualifies for a distribution they have three options:

Roll-over your qualified plan to an IRA and continue deferring taxes
Take a distribution and pay ordinary income tax on the full amount
Take advantage of NUA and reap the benefits of a more favorable tax structure on gains

How does Net Unrealized Appreciation work?

First an employee must be eligible for a distribution from their qualified plan; generally at retirement or age 59 1⁄2, the employee takes a "lump-sum" distribution from the plan, distributing all assets from the plan during a 1 year period. The portion of the plan that is made up of mutual funds and other investments can be rolled into an IRA for further tax deferral. The highly appreciated company stock is then transferred to a non-retirement account.

The tax benefit comes when you transfer the company stock from a tax-deferred account to a taxable account. At this time you apply NUA and you incur an ordinary income tax liability on only the cost basis of your stock. The appreciated value of the stock above its basis is not taxed at the higher ordinary income tax but at the lower long-term capital gains rate, currently 15%. This could mean a potential savings of 20%. Let's take a look at an example.

Net Unrealized Appreciation Example

Let's assume the value of Chevron stock within your account is $500,000. The price you paid for the stock is $75,000. If you roll the entire amount to an IRA you will owe nothing in taxes presently. Over time if you were in the 28% federal tax bracket you will pay $140,000 in taxes for distributions.

If you were to take advantage of NUA you will pay ordinary income tax on the cost basis at the time of distribution. This totals $21,000 in taxes today. The tax on the Net unrealized Appreciation would be 15% of the gain, or $63,750. Your total tax liability is $84,750.

In this example, NUA saved over $20,000 in taxes!