How to Pay Less Tax on RTX Stock in Your 401(k) Using NUA
If you are a longtime employee of RTX, Pratt & Whitney, Collins Aerospace, or another RTX company, there's a chance you've accumulated a significant amount of RTX stock inside your 401(k).
If those shares have substantially appreciated over the years, simply rolling your entire 401(k) into an IRA when you retire could cause you to overlook a potentially valuable tax-planning opportunity.
It's called Net Unrealized Appreciation, or NUA.
An NUA strategy may allow qualifying employer stock held inside a 401(k) to receive long-term capital gains tax treatment on the appreciation that occurred while the shares were held in the plan, rather than eventually having that appreciation taxed as ordinary income following an IRA rollover.
Depending on your cost basis, retirement income, and tax situation, this can potentially result in substantial lifetime tax savings.
And for some retirees who can strategically realize long-term capital gains while their taxable income is relatively low, a portion of those gains could potentially fall within the 0% federal long-term capital gains tax bracket.
Let's look at how the NUA strategy works, when it may make sense for RTX employees, and the potential disadvantages you should consider before rolling your 401(k) into an IRA.
Why RTX Employees Should Pay Attention to Company Stock in Their 401(k)
RTX Corporation is one of the largest aerospace and defense companies in the United States and has a particularly significant presence here in Connecticut.
RTX's operations include businesses such as Pratt & Whitney and RTX Technologies headquarters in East Hartford, CT, and the Collins Aerospace in Windsor Locks, CT. Employees of these companies, as well as the many other longtime employees nationwide, have accumulated employer stock through their workplace retirement plans.
For employees who have spent decades with these companies, the difference between what they originally paid for their company stock and what those shares are worth today can be substantial.
That's where NUA becomes particularly useful.
Consider an employee who purchased company stock decades ago at a relatively low price.
If those shares are now worth hundreds of thousands of dollars, simply rolling them into an IRA means future distributions will generally be taxed under the rules applicable to traditional retirement-account distributions.
But NUA may provide another option.
How Is Company Stock Normally Taxed When You Roll Over Your 401(k)?
Before we discuss the NUA strategy, it's important to understand the alternative.
Suppose you retire with RTX stock inside your traditional 401(k) and roll the entire account—including your company stock—into a traditional rollover IRA.
The rollover itself can generally be completed without creating current taxable income when properly structured.
But once the assets are inside the traditional IRA, future taxable distributions are generally included in ordinary income.
That means the special NUA tax treatment that may have been available for qualifying employer stock inside the employer plan can be lost once those shares are rolled into an IRA.
For someone with a substantial amount of highly appreciated RTX stock, that's worth evaluating before completing the rollover.
What Is Net Unrealized Appreciation (NUA)?
Net Unrealized Appreciation (NUA) generally refers to the increase in value of employer stock while that stock was held inside an eligible employer-sponsored retirement plan.
Under the appropriate circumstances, an NUA strategy allows you to distribute qualifying employer stock in-kind from your 401(k) to a taxable brokerage account rather than rolling those shares into an IRA.
You generally recognize ordinary income on the applicable cost basis of the employer stock when it is distributed.
However, the NUA—the appreciation that occurred while the stock was held within the employer plan—is generally not taxed until you sell the shares.
When you eventually sell them, the qualifying NUA portion generally receives long-term capital gains tax treatment, regardless of how soon after the distribution you sell the shares.
That's what makes the strategy potentially so powerful.
A Simple NUA Example
Suppose you originally purchased employer stock inside your 401(k) for:
$25,000
Those shares are now worth:
$300,000
Your NUA would be:
$275,000
With a qualifying NUA strategy, the $25,000 cost basis would generally be included in ordinary income in the year of distribution.
The $275,000 of NUA would generally remain deferred until you sell the stock and then receive long-term capital gains treatment.
Compare that with rolling the shares into a traditional IRA, where future taxable IRA distributions generally don't receive long-term capital gains rates simply because the underlying investment was employer stock.
When Does an NUA Strategy Make Sense?
NUA tends to become more attractive when there is a large difference between the cost basis of your employer stock and its current market value.
For example:
Low cost basis + substantial appreciation = potentially attractive NUA opportunity.
On the other hand:
High cost basis + relatively little appreciation = potentially less attractive NUA opportunity.
That's because the stock's applicable cost basis generally becomes ordinary taxable income when the shares are distributed from the plan.
The larger your cost basis, the larger the potential upfront ordinary-income tax liability.
That's why the first two numbers an RTX employee should determine are:
1. What is my RTX stock currently worth?
2. What is my cost basis in those shares?
You need both numbers before you can meaningfully evaluate NUA.
How the NUA Strategy Works: An RTX Employee Example
Let's look at an example similar to one you might encounter with a longtime Pratt & Whitney employee.
James has worked as an engineer for Pratt & Whitney in East Hartford, Connecticut, since 1990.
Over his career, James accumulated employer stock inside his 401(k), including shares associated with the company's corporate history and subsequent RTX holdings.
Today, James owns:
1,500 shares of RTX
At a hypothetical/current example price of $197.16 per share, his position would be worth:
$295,740
But James's cost basis is only:
$18 per share
That gives him a total cost basis of:
$27,000
The difference between the market value and cost basis is:
$268,740
That's James's Net Unrealized Appreciation in this simplified example.
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Step 1: James Retires From Pratt & Whitney
James is currently 62 and plans to retire.
He has accumulated meaningful cash savings and has other retirement assets available to fund his lifestyle.
His plan is to delay Social Security until his full retirement age of 67.
That creates an important five-year window between retirement and Social Security.
Because James expects his taxable income to be relatively low during these years, he may have opportunities to strategically realize income and long-term capital gains at favorable federal tax rates.
Step 2: James Separates His RTX Stock From the IRA Rollover
Rather than automatically rolling his entire 401(k) into an IRA, James evaluates whether his RTX shares qualify for NUA treatment.
As part of a properly structured qualifying distribution, James directs the RTX shares in-kind into a taxable brokerage account.
His other eligible 401(k) assets could generally be directed to an IRA as part of the overall transaction.
James's RTX stock doesn't need to be sold, the shares must simply be moved/transferred to the taxable account.
Step 3: James Pays Ordinary Income Tax on His RTX Cost Basis
James's applicable cost basis is:
$27,000
That amount is generally included in his ordinary taxable income in the year the shares are distributed.
The much larger $268,740 of NUA, however, isn't taxed at that point.
That tax is deferred until James sells the shares.
This distinction is the central benefit of NUA.
Instead of potentially having the entire value eventually subject to ordinary-income treatment through retirement-account distributions, the qualifying appreciation can receive long-term capital gains treatment.
Step 4: James Strategically Sells RTX Stock in Retirement
James now owns the RTX shares in his taxable brokerage account.
Because he's retired, delaying Social Security, and using cash savings to help fund his lifestyle, he expects several relatively low-income years.
This creates an opportunity to potentially sell portions of his RTX position while managing his taxable income.
Depending on his other income and the federal long-term capital gains thresholds applicable for that year, some or all of his qualifying NUA could potentially fall within the 0% federal long-term capital gains bracket.
That's very different from assuming every dollar withdrawn from a traditional IRA will be subject to ordinary income tax rates.
Can You Really Pay 0% Federal Tax on NUA?
Potentially—but this part requires careful tax planning.
The federal tax code includes a 0% long-term capital gains tax bracket for taxpayers whose taxable income remains below the applicable threshold.
This doesn't mean everyone using NUA pays 0% tax.
Long-term capital gains are stacked on top of your other taxable income when determining the applicable capital gains rate.
For example, income from:
Wages
Pensions
Traditional IRA withdrawals
Interest
Taxable Social Security benefits
Roth conversions
Other investment income
can affect how much room you have remaining within the 0% capital gains bracket.
That's why NUA can become particularly interesting during the retirement tax-planning window after someone stops working but before Social Security and required minimum distributions significantly increase their taxable income.
For someone like James, coordinating cash savings with strategic sales of RTX stock could potentially allow him to realize some of his NUA at very favorable federal capital gains rates.
Don't Confuse 0% Capital Gains With 0% Total Tax
This distinction is important.
Being able to realize some NUA within the 0% long-term capital gains bracket doesn't necessarily mean you have zero total federal income tax liability.
Remember that the applicable cost basis of the shares distributed under the NUA strategy was generally included in ordinary income.
You may also have pension income, interest, IRA withdrawals, Roth conversions, or other taxable income.
The objective is to determine how much of your long-term capital gain can fit within the 0% bracket after considering your complete tax picture.
What Happens to RTX Stock Gains After the NUA Distribution?
Another important distinction involves when the appreciation occurs.
Suppose James's RTX stock is worth $295,740 when it's distributed from his 401(k).
The appreciation that occurred while the stock was held in the employer plan represents his NUA.
But imagine he continues holding the shares after they're transferred to the taxable account and they're eventually worth $325,000.
That additional appreciation occurred after the NUA distribution.
The original NUA generally receives long-term capital gains treatment when the shares are sold.
The additional appreciation after distribution is treated separately, and whether that post-distribution appreciation is a short- or long-term capital gain depends on the applicable holding period.
That's another reason detailed recordkeeping is important when implementing an NUA strategy.
What Are the Requirements for an NUA Strategy?
NUA isn't simply a tax election you can make whenever you want.
There are specific requirements that need to be satisfied.
A qualifying NUA strategy generally involves a lump-sum distribution following an applicable triggering event.
Potential triggering events include:
Separation from service
Reaching age 59½
Disability, when applicable under the rules
Death of the plan participant
The lump-sum distribution requirements are particularly important.
Improperly handling distributions before completing the NUA transaction can potentially jeopardize the strategy.
For that reason, don't automatically begin moving money out of your RTX retirement plan if you're considering NUA.
Evaluate the strategy first.
Things to Consider Before Using an NUA Strategy
NUA can provide significant tax advantages, but that doesn't mean it's always the best strategy.
Here are several of the biggest considerations.
1. Immediate Ordinary Income Tax
The applicable cost basis of your RTX or other employer stock generally becomes taxable as ordinary income when the shares are distributed. Suppose your stock is worth $300,000 but has a $200,000 cost basis.
You may be creating a substantial amount of ordinary taxable income to receive NUA treatment on only $100,000 of appreciation. In this particular case the NUA strategy may not be appropriate.
Compare that with someone who owns $300,000 of company stock with only a $25,000 cost basis.
The economics of the strategy can be dramatically different.
2. Your NUA May Not Be Large Enough
NUA is generally most compelling when employer stock has substantially appreciated relative to its cost basis.
If your basis is relatively close to the stock's current value, the potential capital-gains tax benefit may not justify the complexity or immediate tax consequences.
Don't use NUA simply because it's available.
Calculate the actual potential tax savings.
3. You Lose Some Tax-Deferred Growth
Once the RTX stock is transferred into a taxable brokerage account, it no longer receives the benefit of tax-sheltered growth inside your 401(k). Future taxable dividends and realized gains can create current taxable income.
If you eventually sell shares, additional post-distribution appreciation can also create short- or long-term capital gains depending on the timing of the sale.
4. Employer Stock Concentration Risk
This is one of the most important considerations.
Someone using NUA may become reluctant to sell employer stock because they don't want to “waste” the strategy.
But tax planning shouldn't override sound investment management.
If a substantial percentage of your retirement portfolio is invested in RTX stock, your retirement security may become overly dependent on the performance of a single company.
For a current employee, the risk can be even greater.
Your:
Paycheck + career + retirement savings
may all be tied to the same company.
If the employer experiences significant financial difficulties, both your employment income and a substantial portion of your investment portfolio could be affected simultaneously.
NUA should therefore be incorporated into a broader diversification strategy, not used as a reason to maintain excessive exposure to company stock.
5. NUA Has Strict Distribution Requirements
The tax benefits of NUA depend on satisfying the applicable requirements.
This is not a transaction you want to improvise.
Distributions taken at the wrong time or an improperly structured rollover can potentially affect your ability to use NUA treatment.
If you have highly appreciated RTX stock inside your retirement plan, evaluate the strategy before initiating a full IRA rollover.
Once qualifying employer stock is rolled into an IRA, you generally can't later move those shares out of the IRA and recreate the NUA opportunity.
NUA vs. IRA Rollover: Which Is Better?
Suppose you retire with $300,000 of highly appreciated RTX stock.
You essentially need to evaluate two potential paths.
Option 1: Roll the RTX Stock Into an IRA
The rollover can generally maintain the tax-deferred status of the assets.
However, future taxable distributions from the traditional IRA generally receive ordinary-income treatment rather than the special long-term capital gains treatment available for qualifying NUA.
Option 2: Use the NUA Strategy
Qualifying shares are distributed into a taxable brokerage account.
You generally recognize ordinary income on the applicable cost basis upfront, while the NUA can receive long-term capital gains treatment when the shares are sold.
Neither option is universally better.
The comparison depends heavily on:
Your RTX cost basis
Amount of NUA
Current tax bracket
Expected future tax brackets
Capital gains rates
Age
Retirement date
Other retirement income
Portfolio diversification
Estate-planning objectives
State taxes
Expected holding period
You should model both strategies before making any final decisions.
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NUA vs. Roth Conversions: Which Strategy Is Better?
This is another important comparison for someone retiring with a large 401(k).
Suppose you have highly appreciated RTX stock and expect several low-income years after retirement.
You could potentially use that tax window for NUA.
But you may also have an opportunity to complete Roth conversions from your pre-tax retirement accounts.
Roth conversions can intentionally accelerate taxable income today in exchange for moving assets into a Roth account where future qualified withdrawals can be tax-free.
This creates a planning tradeoff.
How much taxable income should you recognize from your NUA cost basis?
How much NUA should you realize at favorable capital gains rates?
How much room should you preserve for Roth conversions?
Would additional income affect the taxation of Social Security or Medicare IRMAA premiums later in retirement?
These strategies shouldn't be evaluated independently.
For some retirees, the best answer may involve a combination of:
NUA + Roth conversions + strategic IRA withdrawals + capital gains harvesting.
The goal isn't simply to pay the lowest tax bill this year.
The goal is to potentially minimize taxes over your lifetime.
What Should RTX Employees Do With Company Stock When They Retire?
If you're approaching retirement from RTX, Pratt & Whitney, Collins Aerospace, or another affiliated employer and own company stock inside your 401(k), don't automatically roll everything into an IRA.
First, determine:
How many RTX/company shares do I own?
What is their current market value?
What is my cost basis?
How much Net Unrealized Appreciation do I have?
Then compare the potential NUA strategy with alternatives such as:
Rolling the shares into an IRA
Diversifying the position
Roth conversions
Strategic retirement withdrawals
Capital gains harvesting
Charitable planning
Other retirement-income strategies
You should also determine how your company stock fits within your overall investment portfolio.
An attractive tax strategy doesn't necessarily justify maintaining an excessive concentration in one stock.
Is the NUA Strategy Right for You?
There isn't a universal answer.
For some longtime RTX employees with highly appreciated company stock and an extremely low cost basis, NUA could potentially provide substantial lifetime tax savings.
For someone whose company stock has a relatively high cost basis, the benefit may be much smaller.
Others may find that an IRA rollover combined with Roth conversions, charitable planning, or another retirement-income strategy better fits their objectives.
That's why NUA should be analyzed as part of your complete retirement tax plan, rather than viewed as an isolated transaction.
Before moving company stock out of your 401(k), compare:
NUA vs. IRA rollover vs. Roth conversions
and model the potential tax consequences over your expected retirement.
Once certain rollover decisions are made, you may not be able to reverse them.
Final Thoughts
If you've worked for RTX or one of its affiliated companies for many years, RTX company stock may represent more than just another investment inside your 401(k). It may represent a significant tax-planning opportunity.
The Net Unrealized Appreciation strategy can potentially allow qualifying appreciation on employer stock to receive long-term capital gains treatment instead of eventually being taxed as ordinary income following an IRA rollover.
For retirees entering a period of relatively low taxable income, the strategy can become even more interesting because some qualifying long-term capital gains could potentially fall within the 0% federal capital gains bracket.
But NUA isn't automatically the right answer.
Your cost basis, tax bracket, portfolio concentration, retirement income, Roth conversion opportunities, state taxes, charitable goals, and the strict NUA distribution requirements all need to be considered.
Most importantly:
Evaluate NUA before rolling your entire 401(k) into an IRA.
If you own highly appreciated RTX stock and would like to understand how NUA fits within your retirement plan, consider working with a financial professional who can model the strategy alongside your retirement income and long-term tax projections. My team and myself here at Morrissey Wealth Management are particularly versed in employing this strategy and have worked closely with a number of current and former RTX and RTX subsidiary employers to incorporate NUA and other valuable tax planning strategies into their broader retirement plan. Click below to schedule a complimentary 20-minute introductory call to discuss your situation and learn how I and my team can be of service!
Click here to schedule a 20-minute intro call — Ryan Morrissey CFP®, CLU®, CHFC®, CMFC | Helping CT Residents Plan for Retirement Since 2001.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
____________________________________________________________________________________________
Frequently Asked Questions About NUA
What is Net Unrealized Appreciation (NUA)?
Net Unrealized Appreciation, or NUA, generally refers to the increase in value of employer stock while it is held inside an employer-sponsored retirement plan. Under qualifying circumstances, NUA can receive long-term capital gains treatment when the employer stock is sold following its distribution from the plan.
How does the NUA strategy work?
Instead of rolling qualifying employer stock into an IRA, the shares are generally distributed in-kind to a taxable brokerage account as part of a qualifying transaction. The applicable cost basis is generally taxable as ordinary income when distributed, while the NUA is generally deferred until the stock is sold.
How is NUA taxed?
The applicable cost basis of employer stock is generally included in ordinary income when the shares are distributed. The NUA is generally taxed as a long-term capital gain when the shares are eventually sold.
Can NUA be taxed at a 0% federal capital gains rate?
Potentially. Because qualifying NUA receives long-term capital gains treatment when the shares are sold, some or all of the gain could potentially fall within the 0% federal long-term capital gains bracket if your taxable income is sufficiently low. Your other taxable income must be considered when determining the applicable rate.
Can RTX stock qualify for NUA?
Potentially. Qualifying employer securities held within an eligible employer retirement plan may be eligible for NUA treatment when the applicable requirements are satisfied. RTX employees should confirm their holdings, cost basis, plan provisions, and eligibility before initiating a distribution.
Should I roll my RTX stock into an IRA when I retire?
Not automatically. Rolling employer stock into an IRA can eliminate the opportunity to use NUA treatment on those shares. Employees with highly appreciated RTX stock should compare an NUA distribution with an IRA rollover before moving the stock.
When does an NUA strategy make sense?
NUA can be particularly attractive when employer stock has appreciated substantially and has a relatively low cost basis. Your current and future tax rates, retirement income, capital gains rate, portfolio concentration, and other planning opportunities should also be considered.
What are the NUA lump-sum distribution requirements?
NUA generally requires a qualifying lump-sum distribution following an applicable triggering event. Because the requirements are strict and improperly timed distributions can affect eligibility, the transaction should be reviewed before initiating withdrawals or rollovers.
What happens if I roll my company stock into an IRA?
Once employer stock has been rolled into an IRA, the special NUA treatment that may have been available while the shares were held within the employer plan generally cannot later be recreated simply by distributing the stock from the IRA.
What is the difference between NUA and a Roth conversion?
NUA potentially provides long-term capital gains treatment for qualifying appreciation on employer stock. A Roth conversion intentionally moves pre-tax retirement assets into a Roth account, generally creating taxable income in the conversion year in exchange for potential qualified tax-free withdrawals later. Either or both strategies may be appropriate depending on your circumstances.
What are the disadvantages of NUA?
Potential disadvantages include an immediate ordinary-income tax liability on the stock's applicable cost basis, loss of continued tax deferral after assets enter the taxable account, potential taxation of dividends and future gains, employer-stock concentration risk, and strict distribution requirements.
What should RTX employees do with company stock when they retire?
Before completing a 401(k) rollover, determine the market value and cost basis of your RTX stock and calculate your potential NUA. Then compare NUA with an IRA rollover, diversification, Roth conversions, charitable strategies, and your broader retirement-income plan.