Let’s start with the situation.

Suppose someone has:

• $3M in a 401(k)
• $1.5M of which is employer stock
• A cost basis of only $200k in the stock

Many people would simply roll the entire account into an IRA and miss one of the most valuable tax planning opportunities available.

Instead, NUA (Net Unrealized Appreciation) may allow them to distribute the employer stock from the retirement plan and pay ordinary income tax on only the $200k basis.

The remaining $1.3M of appreciation can potentially receive long-term capital gains treatment when sold.

That’s a huge improvement, but now the clients owns a highly concentrated stock position in their brokerage account.

(Obviously you can use a tax-aware long/short strategy here as well, but I wanted to show an alternative for this post)

That’s where a Section 351 exchange can potentially help.

Rather than selling the stock and triggering capital gains, the shares may be contributed (along with other stocks and ETFs) into a newly launched ETF structure, allowing the investor to diversify while continuing to defer taxes.

Now we’ve solved the tax problem and the concentration problem.

The next challenge is liquidity.

Because the investor now owns a diversified portfolio, the position may be much better suited as collateral for a box spread loan.

Instead of selling assets and paying taxes, they can potentially borrow against the portfolio at attractive rates while continuing to defer the embedded gain.

In one case we’re working on, we’re taking it a step further.

The box spread loan proceeds are being invested into a tax-aware hedge fund that can realize ordinary deductions.

Those deductions can help offset the ordinary income created by the NUA basis adjustment today, and in future years can potentially be used to offset Roth conversions as we work to reduce the client’s IRA balance before RMDs begin.

This is why I find taxable investing so fascinating.

Most people look at:

• NUA
• Section 351 exchanges
• Box spreads
• Tax-aware hedge funds
• Roth conversions

as completely separate strategies.

The real magic happens when they’re coordinated together as part of a comprehensive financial plan.