Retirement Tax Strategy
Net Unrealized Appreciation (NUA)
If you hold appreciated company stock inside a 401(k), NUA is a provision in the tax code that may allow the growth on those shares to be taxed at long-term capital gains rates instead of ordinary income rates. It is powerful in the right situation — and costly if the steps are done out of order.
Review My Company StockWhat is net unrealized appreciation?
Net unrealized appreciation is the difference between what your employer stock cost inside your retirement plan (its cost basis) and what those shares are worth when they leave the plan. Under IRS rules, when employer securities are distributed in kind as part of a qualifying lump-sum distribution, only the cost basis is treated as ordinary income in that year. The appreciation — the NUA — is generally taxed as a long-term capital gain when you eventually sell the shares.
By contrast, if the same shares are rolled into an IRA, every future dollar withdrawn is taxed as ordinary income. For a long-tenured employee whose shares were purchased at a low basis, the difference in tax treatment can be meaningful. For someone with a high basis, a rollover is frequently the better answer.
How the NUA process works
The sequence matters. A single misstep — selling inside the plan, or splitting the distribution across two tax years — can eliminate the benefit permanently.
Confirm eligibility
NUA treatment generally requires a qualifying triggering event (separation from service, reaching age 59½, disability, or death) and a lump-sum distribution of the entire plan balance within a single tax year.
Identify cost basis
Your plan administrator reports the cost basis of the employer shares. The spread between that basis and the market value at distribution is the net unrealized appreciation.
Distribute shares in kind
The company stock moves in kind to a taxable brokerage account, while the remaining plan assets are typically rolled to an IRA. Selling the shares inside the plan first forfeits NUA treatment.
Compare against a rollover
We model NUA against a full IRA rollover across your expected tax brackets, retirement income timeline, charitable intent, and estate goals before recommending a path.
NUA versus a standard IRA rollover
| Feature | NUA treatment | IRA rollover |
|---|---|---|
| Tax in distribution year | Ordinary income on cost basis | None — remains tax-deferred |
| Tax on appreciation | Long-term capital gains when sold | Ordinary income when withdrawn |
| Where shares sit | Taxable brokerage account | Tax-deferred IRA |
| Required minimum distributions | Not applicable to the distributed shares | Applies to the IRA balance |
| Heirs' treatment | NUA portion does not receive a step-up in basis | Inherited IRA distribution rules apply |
| Best suited for | Low cost basis relative to current value | High cost basis, or a desire to stay tax-deferred |
Key considerations before you act
- Ordinary income tax is generally due in the distribution year on the cost basis of the shares, which can raise that year's taxable income.
- The NUA portion is generally taxed as long-term capital gain when the shares are sold, regardless of how long they were held after distribution.
- Appreciation after the distribution date is taxed under normal capital gains holding-period rules.
- Shares held outside a retirement account concentrate risk in a single company; the value moves with that stock's price.
- A distribution before age 59½ may be subject to an additional 10% early distribution penalty on the cost basis.
- An IRA rollover keeps the full balance tax-deferred and may be the better outcome when the cost basis is high relative to the current value.
Rules for NUA are set out in Internal Revenue Code Section 402(e)(4). Individual results depend on your plan documents, cost basis, and tax situation.
Important Disclosure
This page is educational and general in nature. It is not investment, tax, or legal advice, and it is not a recommendation to take or avoid a distribution from any retirement plan. Tax outcomes described are illustrative of the general rules and are not a projection of your results.
Holding a concentrated position in a single company's stock involves risk, including loss of principal; the value moves with that company's share price. NUA treatment requires strict compliance with IRS rules, and an error in execution can permanently forfeit the benefit. Consult a qualified tax professional regarding your specific circumstances before acting.
Company stock in your 401(k)?
We'll model NUA against a rollover before anything moves.