Retirement issues have continually made the headlines this past year. One issue that is typically not as widely discussed is Net Unrealized Appreciation (NUA). NUA is used when an employee takes a lump-sum distribution from a retirement plan that is funded with employer stock, such as an ESOP. The distribution is split up between the employer’s stock basis and the appreciation at the date of distribution. The employer’s basis is taxed as ordinary income and the appreciation receives long-term capital gain treatment. Sounds easy enough; however, it is important to note that the lump-sum distribution does not require the employee to sell the stock. They may hold onto the securities and risk a decrease in value to the stock. If this is chosen, NUA is noted at the distribution date. If the stock is sold one year after the distribution, the entire appreciation will receive long-term capital gain treatment. If it is sold within one year of distribution, the final sales price is reduced by the employer’s adjusted basis and the total capital gain is determined. The NUA is then deducted from the total capital gain to separate the short-term capital gain portion. This is pretty confusing and is easier to understand when applied to an actual situation. A common option for employee’s is rolling over their retirement plan to an IRA once they leave employment. By doing this, the beneficial NUA treatment is lost and all distributions from an IRA are treated as ordinary income. In order to protect the NUA treatment, this should be considered carefully and with a professional.