If you’ve spent a long career at 3M and built up company stock inside your 401(k), there’s a tax strategy worth knowing about. It’s called net unrealized appreciation, or NUA. NUA is a method of taking company stock held within a 401(k), extracting it to a brokerage account, and ultimately paying capital gains tax rates on the appreciation instead of ordinary income rates.
Why NUA Matters
Let’s start with the tax discussion. When you withdraw money from a traditional 401(k), all of it is taxed as ordinary income, no matter how it grew. That means interest, dividends, and stock gains are all taxed as income.
For most investments in a 401(k), that’s just part of the deal for years of tax deferral. You get the benefit of tax deferral, but eventually Uncle Sam comes to collect as distributions get taxed at income rates. However, 3M stock can be treated differently.
Many employees have accumulated shares over decades, often at much lower prices than where the stock sits today. That creates significant built-up gains in the account. Without planning, all those gains get taxed at ordinary income rates when you withdraw them. That’s exactly the problem NUA is designed to solve.
What NUA Actually Does (In Plain English)
NUA lets you separate how different parts of your 3M stock are taxed. Instead of everything being taxed as ordinary income, only the original cost (basis) counts as income, and the growth (the appreciation) is taxed later at long-term capital gains rates.
Example:
The cost basis is $60,000, and the 3M stock inside the 401(k) has a current value of $260,000. This results in a built-in gain of $200,000.
If you were to apply NUA, the basis of $60,000 would be taxed as ordinary income, and the $200,000 gain will then be taxed at capital gains rates, but only upon sale.
The Rules of NUA
- Only employer stock qualifies for NUA, so it would have to be 3M stock.
- The stock must come directly from your 401(k). Once that stock is rolled into an IRA, the opportunity is permanently gone.
- You must take a lump-sum distribution, meaning your entire 401(k) is distributed in one tax year. This is done by moving the stock into a taxable account and rolling everything else into an IRA or Roth IRA.
- All this must be done during a triggering event such as retirement, a separation from 3M, or reaching age 59 ½.
How the Taxes Actually Play Out
At the time of distribution, you will pay ordinary income tax on the cost basis. Later, when and if you sell the stock, the appreciation is taxed at long-term capital gains rates, regardless of how long you hold it after distribution. Any additional growth that occurs after the NUA is triggered is taxed separately like a normal investment at either short-term or long-term capital gain rates.
Why NUA Can Be a Big Deal for Retirement Planning
NUA can help with a problem many retirees run into: required minimum distributions (RMDs). For those born between 1951 and 1959, RMDs will begin at age 73, and for those born in 1960 or later, RMDs will begin at age 75.
RMDs can increase your taxable income, potentially pushing you into higher tax brackets. They can raise Medicare premiums, and for some, they may affect how much their Social Security is taxed.
By moving 3M stock out of your 401(k), that portion is no longer subject to RMDs, so you can decide when to sell, and you control when taxes are triggered. For many people, that flexibility becomes incredibly valuable over time.
Like most strategies, this isn’t for everyone. It is especially compelling when your cost basis is low relative to the current stock price, you have a meaningful amount of 3M stock, you want to reduce future RMD pressure, and you can execute the strategy in a lower-income year (like early in retirement)
Final Thoughts
NUA is one of those strategies that tends to fly under the radar, but for long-tenured 3M employees with appreciated stock held in their 401(k), it can be incredibly impactful. We often find that a big key is timing. This isn’t something you can go back and do after the funds have moved, so learning about the strategy in advance, modeling future RMD’s with and without NUA, and understanding expected tax liabilities with and without NUA are critical.
For personalized financial guidance tailored to the needs of 3M and Solventum employees, click here to schedule a meeting with a Beacon Pointe advisor.
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