Ep: 192 Unlocking the Secrets of Net Unrealized Appreciation: A Deep Dive with the Professor

David Chudyk, CFP®
00:00:00

Welcome to this week's episode of the Weekly Wealth Podcast. On this episode, my friend, colleague and the professor, Justin Chastain and I will be discussing Net Unrealized Appreciation.

We'll talk about what it is, why it's important, and some of the decisions that you might need to make with regard to your Net unrealized appreciation.

So speaking of appreciation, I would really appreciate if you would share our show with your friends, with your family, with your colleagues and your co workers. And I would also appreciate, appreciate if you would like and subscribe and follow the show on the platform where you listen to it. Okay.

I hope that you enjoy this episode. Welcome to the weekly Wealth Podcast. I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money. We talk about financial strategies, prosperous mindsets, and simply how to build true wealth. So come on and let's

Justin Chastain CFP®
00:01:26

I'm doing well, David. I'm glad to be back.

David Chudyk, CFP®
00:01:29

So talk to us again. Why do we call you the professor man? Like I thought you, you're just some ordinary financial advisor or are you not?

Justin Chastain CFP®
00:01:36

Well, no. I mean, I pay a lot of money, David, to people on the street to say that.

No, it just came up in general conversation as ribbing because, you know, as I've said before, my general passion around financial planning is education.

And through that, one of the things that I do in conjunction with being a financial planner here at Parallel Financial is I teach certified financial planners before they actually get that CFP designation. So I teach classes at night, you know, ultimately informing students around all things financial planning.

And I specifically focus on retirement planning, the fundamentals aspect, and then also that investment advisory aspect of that. And again, you know what was so interesting? When you teach or you serve, you think, okay, hey, I'm going to be offering to somebody.

But in turn, you're learning as much as the actual students are at times because things change so much in our industry. It's just good to stay on top of things.

David Chudyk, CFP®
00:02:40

Yeah, man, I mean, you're my go to guy when I need to confirm like the latest guideline or latest rule on, on a, on a topic. So I appreciate, I appreciate Our relationship.

Justin Chastain CFP®
00:02:49

Oh, absolutely. But you know, your bill is due, David. And I've sent.

David Chudyk, CFP®
00:02:53

The bill is due. All right. I hadn't gotten them, so I don't know what happen. They must have gone to, they must have gone to junk, junk mail.

So, all right, so probably nobody woke up this morning saying, man, I hope those two guys do a, do a podcast on NUA Net. Unrealized appreciation. But this is actually a really important topic, depending on who you are and some different circumstances. So let's start off.

I always like to start off with the basics, especially when we have the professor on the line, Nua. What is NUA Net? Unrealized Appreciation.

Justin Chastain CFP®
00:03:31

So for people that have employee stock. So if you work in an organization or let's just say a big company, and I'm just going to throw it out here. Michelin. Right.

And you were able to purchase Michelin stock for a set price. And let's just give out the example of $10 per share.

But if we go on the secondary market and we look and we say, okay, well, per share, Michelin stock is trading for 50, but you're allowed to buy it at $10 a share, that $40.

David Chudyk, CFP®
00:04:05

So that's a great deal, right? I mean, if you can take advantage of that, that's a great deal.

Justin Chastain CFP®
00:04:09

Absolutely. And I mean, you know, it would be the equivalent, David, if I had a brand new Rolex that goes for $8,000.

And I said, David, I'll sell this Rolex to you for 1000. Right? You would probably, I mean, with it being me, you'd probably say, well, Justin, is it fake? And I said, no.

I mean, don't, don't worry about the scratches or serial numbers. You're asking too many questions. But yes, a great deal. So that appreciation, that $50 minus the 10, that's $40 of appreciation.

Well, eventually when we either retire or change jobs or we become 59 and a half, we might be thinking about rolling that money over, right? Well, in any other circumstance, if we just roll it over and start distributing money out of it, that $40 could be taxed at ordinary income.

Well, ordinary income is extremely high with nua, if we do this correctly, and we'll talk about how we format this a little bit later, that $40 difference that you're getting per share could potentially be taxed at capital gains rate, which is much mor

David Chudyk, CFP®
00:05:48

Yep. Now everybody loves saving on their taxes.

And I think it's part of our jobs is we help clients to manage their investments, but we also want to help them in all other areas of the financial planning process. And tax planning certainly is one of them. Let's talk about some strategies for dealing with nua.

So let's say you've been working for Michelin and you have stock that you've accumulated over time, that's it has a value of a million dollars, but you've paid, let's just, just to keep the numbers easy, you've paid $100,000 towards it because Michelin, for lack of a better term, they gave you a discount. So that's a great deal. You spent $100,000 on stock and you now have a portfolio that' worth a million. What can happen now?

Justin Chastain CFP®
00:06:41

So, and again, in most people's portfolio, they're going to have that employer stock and then you've probably got something maybe like a Target Date Fund or other securities. Right.

Well, when you or the client or whoever is working at Michelin says, you know what, it's time for me to either retire or you could become disabled, or maybe you're just switching jobs, you've got a decision to make. We can either leave that money there in the current 401k at Michelin or we can roll that money over. Right.

David Chudyk, CFP®
00:07:14

But now, generally speaking, and this is painting with a really broad brush, having a large portion of your portfolio be of any one stock, that kind of breaks a little bit of an investment rule, kind of the diversification and keeping all your eggs in one basket. So just for that purpose, you may not want to have so much of that one holding. Right?

Justin Chastain CFP®
00:07:35

Correct. And that's exactly right.

We want to be divers, diversified because with any stock that can be, I mean, you know, David, we've heard with Amazon or any of these good, okay, those are good stocks to have, but you've got to diversify, Right. Because you don't want just that one stock.

Because again, if a market risk situation happens or, you know, something out of the ordinary happens, you've only got that one stock that's going to weather the storm, as they say. So generally speaking, when this client rolls that money over from Michelin, We've got two options.

The money that is not in employer stock, you can roll that money over into either an ira, an individual retirement arraignment account, and that's fine for the employer stock.

In order to get that NUA opportunity and to be able to have an opportunity to be taxed at long term capital gains rates, which is what we're want Morning. We need to move that employer stock into a brokerage account. That has to go into a separate account.

We have to

David Chudyk, CFP®
00:10:20

And when we talk about, you know, the marginal rate when you're talking about $900,000 would be 37%. So 37% of $900,000. I'm not even smart enough to figure out how much money that is, but it's a lot.

Justin Chastain CFP®
00:10:32

It's a lot of money.

David Chudyk, CFP®
00:10:34

Yeah. And we don't want that to go to the government. If we can handle it, if we can, if we can prevent it for sure.

Justin Chastain CFP®
00:10:39

And you know, like I tell clients too, David, And I'm sure you do as well. It's not so much that we are trying to never pay taxes.

I mean, you know, the benefit of having to pay tax means that we've earned a little bit more money. Right. But what we're trying to do is legally avoid taxes, right? Not evade tax. Sure, we are trying to legally avoid them.

And if we can get our hands on our money before Uncle Sam, that gives us the ability to give our dollar a job versus the government telling us what we need to do with it. And again, we need to pay taxes, but we just want to try to reduce those as best possible.

And again, for somebody that made a $900,000 gain, you know, $100,000 taxed at 37% is better than $1 million taxed at 37%.

David Chudyk, CFP®
00:12:22

What are some of the potential mistakes that one can make when they're getting to that 59 and a half or separating, separating, you know, from service from their company with regard to company stock?

Because again, like we said, it's a great deal assuming that you work for a good company and the stock is a, is a, is a good stock that, that you would like to own. So it's a great deal to have an offering price for a stock that's well below market value.

But again, we have some mistakes that could be made and they can be pretty, pretty costly. So let's hit some of those that we could potentially make.

Justin Chastain CFP®
00:13:02

I think number one, the client just being anxious to roll all of their money over immediately. The number one thing you want to do is really kind of take your time with it and understand what you have inside of that 401k.

You know, I've seen clients that are well versed and they're like, oh my gosh, I didn't realize that I've had employer stock inside of this. Right.

So making sure that you taking your time and you're working with someone inside of your 401k that are looking at, making sure you know for certain what you have. I think the second thing is, is to determine. And again, this goes back into planning and what we do with our clients.

What is your plan once you retire, maybe from this W2 company? Do you want to start a consulting company? Are you taking an early retirement? Are you not going to do anything?

And the reason these questions are important. We need to know if your income taxes are going to be higher now or they'll be higher later down the road or vice versa. Why is that important?

Wel

David Chudyk, CFP®
00:16:06

When we're looking at clients of a certain level, there are so many factors that need to be considered and factors that the client would maybe not have even thought that could ever be an issue.

I was talking with someone today just about he wanted to take a distribution from his retirement account and he understands he would take, it'll be a tax hit. And I said, look, dude, you're doing this to do some renovations. We're almost to the end of the year. Why not do half of it now?

And then as soon as January 1st comes along, do the other half instead of taking the big hit now. He was like, that makes perfect sense. I never thought of that. And that is going to save him probably $15,000 in taxes this year. So, you know, it's.

There are a lot of things that we've just been around as financial advisors that we just know the questions to ask. So not that not anybody can't handle this stuff on their own because there are times when they can.

But I'm always a big proponent of seeking advice in the areas of life wh

Justin Chastain CFP®
00:17:35

And you know, David, I think you bring up a good point in that as well, is, you know, even with us as financial advisors, somebody asked me, they're like, oh, well, you must know everything. I said, absolutely not. But the one thing that we can do, and I think even with the handyman, I would guarantee you there's something.

There's some things that comes across in the things he's building or working on or fixing that he has to do a little bit of research. But here's the deal. When you're in that industry, you know whom to go to when you have those questions to do it correctly.

Same thing with us, the things we're talking about here, David. I mean, this is a very high level. This stuff gets complicated even for guys like you and I.

But we're constantly talking with each other, asking questions, researching things, and we have the tools and the resources to be able to research it effectively and efficiently. And, you know, it sounds cliche, but time is money.

And even for me, like you said, paying a handyma

David Chudyk, CFP®
00:18:50

And you know, people, when you say I'm a financial advisor, they're always asking like, well, what's the biggest stock? Should I buy Nvidia? Should I not buy Nvidia? What should I do? Should I buy crypto?

Nobody's ever asked me, hey, can you talk to me about the details of net unrealized appreciation? Because they don't even know that it exists.

But there are a lot of areas of financial planning similar to this that have pretty dire consequences if you don't get them right. So just, just, just a lot of things to think about. So. So cool.

So tell everybody if, if they have some NUA questions and, and if they're thinking, I'd like to talk to Justin about it. How would, how would somebody find Justin and how could they get in touch with you?

Justin Chastain CFP®
00:19:29

Yeah, so I'm on all the socials now. Facebook, LinkedIn, MySpace. I know, David, you're still following there. You're my top one friend.

And then always anybody can reach out to me and email me@justinaralfinancial.com awesome.

David Chudyk, CFP®
00:19:46

Well, I appreciate your expertise and I appreciate that we can dive deeply once a month into a topic that our, that our listeners may or may not even know exists. And we can talk about a deep dive into subjects like net unrealized appreciation, something a lot of people don't know exists.

But a lot of people may have just worked for a company for years and years and years and years. They may not even know that a little bit of money is coming out of each, each paycheck, buying company stock.

But then there are some major decisions to be made once, once they leave the job or they turn 59 and a half and those things happen. So that is where you need to know what you're doing or you need to be working with someone who does. So.

All right, man, well, I appreciate, appreciate your time and looking forward to next month's edition of the weekly wealth podcast, Ask the Professor. Thanks, Justin. Awesome. Thank you, David.

The information contained herein included, but not limited to research, market valuations, calculations, estimates and other materials obtained from Parallel Financial and other sources are believed to be reliable. However, Parallel Financial Financial does not warrant its accuracy or completeness.

These materials are provided for informational purposes only and should not be used for or construed as an offer to sell or a solicitation of an offer to buy any security. Past performance is not indicative of any future results.