The Net Unrealized Appreciation Opportunity for P&G Employees
/As a Procter & Gamble (P&G) employee, you’ve built your career at a company known for its stability, innovation, and commitment to its people. One of the most powerful opportunities within your benefits package is Net Unrealized Appreciation (NUA). This tax strategy can help you reduce your tax burden and maximize the value of your retirement savings, especially when applied to your Profit Sharing Trust (PST) and its preferred shares.
What Is Net Unrealized Appreciation?
Net Unrealized Appreciation (NUA) is a strategy established by the IRS tax code that allows you to take advantage of the growth in value of employer stock—such as P&G shares—held within a tax-deferred retirement account like the PST. When you retire or leave P&G, the NUA strategy enables you to shift the appreciation on these shares from being taxed as ordinary income to the more favorable long-term capital gains rates. This can result in substantial tax savings for employees with significant P&G stock holdings.
The P&G Profit Sharing Trust Advantage:
P&G’s PST is a standout retirement vehicle, offering a blend of company contributions in both common and preferred shares. The preferred shares, with their low cost basis of $6.82 per share, are particularly valuable for NUA planning. While P&G stopped contributing preferred shares in 2024, any shares you accumulated prior to that year remain a key asset, amplifying the tax-saving potential of this strategy.
How NUA Works Under the Tax Code
The NUA strategy is governed by IRS rules that provide favorable tax treatment for employer securities distributed from qualified plans like the PST. Here’s how it works:
Lump-Sum Distribution: To qualify, you must take a full distribution of your PST within one tax year, triggered by separation from service, reaching age 59½, or death (IRC Section 402(e)(4)).
Cost Basis Taxation: The cost basis of your P&G shares is taxed as ordinary income in the year of distribution and reported on Form 1099-R. For preferred shares, this is $6.82 per share. For common shares, the cost basis is the combined purchase price from contributions made over the years. While preferred shares typically present the greatest NUA opportunity due to their low cost basis, common shares can also be included in certain situations, depending on your individual holdings and strategy.
NUA Taxation: The appreciation (market value minus cost basis) is deferred and taxed at long-term capital gains rates when you sell the shares, regardless of how long you hold them after distribution.
Penalty Note: If you are under age 59½, the cost basis portion is subject to a 10% early withdrawal penalty. However, the NUA portion is exempt. Strategies such as the Duke Rollback or charitable giving can help mitigate this penalty.
Applying NUA at P&G
Here’s how P&G employees can use NUA:
Take a Lump-Sum Distribution: Withdraw your entire PST balance in one tax year.
Transfer Preferred Shares: Move these shares into a taxable brokerage account.
Pay Tax on Cost Basis: Ordinary income tax applies to the cost basis ($6.82 for preferred shares and, in certain cases, the cost basis for common shares).
Consider Tax Mitigation Strategies: In the year of the distribution, consider strategies to reduce your tax liability on the cost basis. Options include the Duke Rollback strategy or charitable gifting using a Donor Advised Fund (DAF).
Defer NUA Taxes: The appreciation remains untaxed until you sell the shares.
Sell and Save: When you sell, the NUA is taxed at long-term capital gains rates—often much lower than ordinary income rates.
A Brief Example: NUA in Action for a P&G Employee
Consider a P&G employee with 5,000 preferred shares in their PST, each with a cost basis of $6.82. By taking a lump-sum distribution, they would report $34,100 as ordinary income (5,000 shares x $6.82). It’s important to note that $34,100 is the amount subject to ordinary income tax—not the actual tax owed, which will depend on your individual tax bracket. If P&G’s current share price is $162, this employee could move $810,000 worth of stock out of the retirement plan, with the appreciation—over $775,000—taxed later at long-term capital gains rates when the shares are sold, rather than at higher ordinary income rates.
The remaining assets from the PST would typically be rolled into an IRA. This allowed the P&G employee to diversify their asset mix, while the appreciated stock benefited from a shift in tax treatment—from ordinary income to long-term capital gains rates. For simplicity, this example does not include any tax mitigation strategies, which could further enhance the benefits of NUA.
Tax Benefits of NUA
Lower Rates: Long-term capital gains rates (typically 15-20%) are generally much lower than ordinary income tax rates (up to 37%), especially for those in higher tax brackets.
Tax Deferral: You control when to realize the gain, giving you flexibility in your retirement income planning.
Key Considerations
Age: If you are under 59½, plan for the 10% penalty on the cost basis and consider alternative income sources or penalty-mitigation strategies.
Comprehensive Planning: NUA is most effective as part of a broader retirement strategy, not in isolation.
Tax Law Changes: Future changes in tax law could impact the advantages of NUA—timing is important.
Complexity: Precise execution is critical; errors or mistimed distributions can result in higher taxes.
Why It Matters for P&G Employees
With the low $6.82 cost basis of P&G preferred shares, NUA offers a rare opportunity to unlock significant value from your PST. Optional strategies like the Duke Rollback or charitable giving can further enhance the benefits. While NUA is a complex strategy, careful planning can transform your P&G stock into a highly tax-efficient retirement asset.
If you’re approaching retirement or considering your next steps at P&G, evaluating the NUA opportunity is a smart move. At Vaultis Private Wealth, we specialize in helping P&G employees navigate these unique benefits. Contact us for a complimentary consultation to see if NUA fits your retirement goals.
Disclosures:
The information in this article is for educational purposes only and is not intended as personalized investment, tax, or legal advice. The Net Unrealized Appreciation (NUA) strategy may not be suitable for everyone, as individual financial goals, risk tolerance, and circumstances differ. Consult a qualified financial advisor, tax professional, or legal advisor before acting to evaluate your specific situation and determine if this strategy fits your needs. Tax laws and regulations are complex and may change, potentially affecting the strategies described. This content reflects tax laws as of March 17, 2025, and future changes could impact outcomes. Past performance does not guarantee future results. All investments involve risks, including the potential loss of principal, and values may fluctuate. The description of the P&G Profit Sharing Trust (PST) reflects current plan details as understood by Vaultis Private Wealth and may change. Refer to official PST documents for the most accurate, up-to-date information. Vaultis Private Wealth does not guarantee the accuracy, completeness, or outcome of this information and is not affiliated with Procter & Gamble, which does not endorse this content. Verify the qualifications of any advisor before engaging their services.