The short answer
If you take your employer’s stock out of your 401(k) in kind, as part of a qualifying lump-sum distribution, you pay ordinary income tax only on what the shares originally cost in the plan. The growth, the NUA, is taxed later at long-term capital gains rates. Roll the same shares into an IRA and every dollar is eventually taxed as ordinary income.
| Piece of the stock’s value | How it is taxed under NUA |
|---|---|
| Cost basis in the plan | Ordinary income in the year of distribution |
| Net unrealized appreciation | Long-term capital gain when sold, at any holding period |
| Growth after the distribution | Capital gain, long- or short-term by holding period |
Based on IRC section 402(e)(4). Simplified; consult a tax professional before acting.
The rules you must meet
- Employer stock in a qualified plan, such as a 401(k), profit-sharing plan, or ESOP. IRAs do not qualify.
- A triggering event: separation from service (for employees), reaching age 59½, death, or disability (for the self-employed).
- A lump-sum distribution: your entire balance in all of that employer’s plans of the same type must be distributed within a single calendar year. The non-stock assets can go to an IRA by direct rollover; the stock must come out in kind.
- In kind to a taxable account. Selling the shares inside the plan first, or rolling them to an IRA, ends the opportunity for those shares.
Watch the order of operations
Taking a partial withdrawal after a triggering event, for example a single withdrawal after you retire, can use up that triggering event. You may then have to wait for the next one, such as reaching 59½, before NUA is available. Plan the full distribution before you take any money out.
A worked example
Mark, 60, is retiring. His $1,500,000 401(k) includes employer stock worth $600,000 with a cost basis in the plan of $100,000. For simplicity, assume a 35% ordinary income rate and a 20% long-term capital gains rate.
| Approach to the company stock | Federal tax |
|---|---|
| Roll everything to an IRA; later withdraw the $600,000 as ordinary income | $210,000 |
| NUA: pay ordinary tax on the $100,000 basis now | $35,000 |
| NUA: later sell, $500,000 taxed as a long-term gain | $100,000 |
| NUA total | $135,000 |
Hypothetical and simplified for illustration; ignores the timing of taxes, investment growth, state taxes, and how the income would actually fall across brackets.
In this example NUA saves about $75,000 of federal tax. Mark rolls the other $900,000 into an IRA by direct rollover in the same year. Because the NUA is taxed as a long-term gain whenever he sells, he can also sell some shares right away to reduce his concentration in one stock without losing the benefit.
Do you hold company stock in your 401(k)?
Before you roll anything over, we’ll run the NUA math on your actual cost basis, coordinate the distribution with your rollover, and plan how to diversify the shares.
Schedule a call →When NUA may not be worth it
- High cost basis. If the shares cost nearly what they are worth today, the up-front tax on the basis may outweigh the capital gains savings.
- You are under 55 or 59½. The 10% penalty can apply to the taxable basis portion unless an exception, such as the Rule of 55, applies.
- You value tax deferral. NUA requires paying tax on the basis now. Leaving everything in an IRA defers all tax, which can matter if you are in a high bracket this year.
- Concentration risk. Holding a large amount of one company’s stock is risky regardless of tax treatment. NUA does not require you to keep the shares. See our concentrated stock guide for diversification strategies.
You do not have to choose all or nothing. Taking only the lowest-basis shares out for NUA and rolling the rest is often the best balance.
Estate planning and NUA
NUA shares do not receive a step-up in basis at death for the NUA portion; heirs who sell pay long-term capital gains tax on it. Appreciation after the distribution may receive a step-up. The NUA portion is also generally not subject to the 3.8% net investment income tax. If charitable giving is part of the plan, NUA shares can be a tax-efficient asset to give, since a qualified charity pays no tax on the gain. See our estate planning approach.
NUA and the rest of your retirement plan
NUA is one piece of a bigger set of decisions you face when you leave a job: whether to roll your 401(k) to an IRA at all, how to bridge to 59½, and when to do Roth conversions. Our guides to 401(k) rollover options at retirement and the Rule of 55 cover those choices.
Frequently asked questions
What is net unrealized appreciation (NUA)?
Net unrealized appreciation is the increase in value of your employer’s stock while it was held inside your 401(k) or other qualified plan: the difference between the stock’s market value when it is distributed and your cost basis in the plan. If you take the shares out in kind as part of a qualifying lump-sum distribution, the NUA is taxed at long-term capital gains rates when you sell, instead of as ordinary income.
Who qualifies for NUA treatment?
You need employer stock in a qualified plan such as a 401(k) or ESOP, a triggering event (separation from service, reaching age 59½, death, or disability for the self-employed), and a lump-sum distribution of your entire balance from all of that employer’s plans of the same type within one calendar year. The shares must be distributed in kind to a taxable account, not sold inside the plan or rolled to an IRA.
How is NUA taxed?
In the year of distribution, you pay ordinary income tax on the stock’s cost basis in the plan, plus the 10% penalty on that amount if you are under 59½ and no exception applies. When you later sell, the NUA is taxed as a long-term capital gain no matter how long you held the shares. Any growth after the distribution is long-term or short-term depending on how long you hold the shares after leaving the plan.
Can I use NUA for only some of my company stock?
Yes. You can take some shares out in kind for NUA treatment and roll the rest, including higher-cost shares, into an IRA, as long as the whole account is distributed within the same calendar year. Shares with a low cost basis relative to their value usually benefit most.
Is NUA subject to the 3.8% net investment income tax?
The NUA portion of the gain is generally not subject to the 3.8% net investment income tax, because it is treated as a retirement plan distribution. Appreciation after the shares leave the plan can be subject to it.
What happens to NUA stock at death?
NUA does not receive a step-up in basis at death. Heirs who sell pay long-term capital gains tax on the NUA, although appreciation after the distribution may receive a step-up. That is one reason some people sell NUA shares during their lifetime.