Net Unrealized Appreciation (NUA): Moving $300K in Company Stock Out of Your 401(k) at Capital Gains Rates

The setup: $300,000 of employer stock, $50,000 basis, one decision

A 62-year-old process engineer retires after 25 years at a Fortune 500 industrial manufacturer in Cincinnati. Her 401(k) balance: $720,000 total — $300,000 in employer stock (cost basis $50,000, current FMV $300,000) and $420,000 in diversified mutual funds. The $250,000 gap between her $50,000 basis and the stock’s $300,000 value is the net unrealized appreciation (NUA).

Her advisor recommends rolling the entire $720,000 to a traditional IRA. That’s the default advice — and for the $420,000 in mutual funds, it’s correct. But for the $300,000 of employer stock, rolling to an IRA converts $250,000 of potential long-term capital gains into future ordinary income. At her projected 24% retirement bracket, that’s a $22,500–$47,000 mistake.

How NUA works: the two-tax split

Under IRC §402(e)(4), when you take a lump-sum distribution from a qualified plan that includes employer securities, the tax treatment splits into two pieces:

• Cost basis ($50,000): taxed as ordinary income in the distribution year. This is the amount you (or the employer match) originally paid for the shares inside the plan.
• NUA ($250,000): NOT taxed at distribution. Deferred until you sell the shares in the taxable brokerage account — and then taxed at long-term capital gains rates, regardless of how long you hold after distribution.

The critical distinction: inside a traditional IRA, every dollar withdrawn is ordinary income — 22%, 24%, 32%, or higher. With NUA, the $250,000 of appreciation is taxed at 15% LTCG (or 20% above $533,400 single / $600,050 MFJ in 2026) plus the 3.8% NIIT if applicable. That rate gap is where the savings live.

The lump-sum distribution trigger: four qualifying events

NUA treatment is only available on a lump-sum distribution — defined as the distribution of your entire balance from all plans of the same type with that employer, within a single calendar year, after one of these qualifying events:

1. Separation from service (retirement, layoff, resignation — not available to self-employed)
2. Reaching age 59½
3. Death (beneficiary can elect NUA)
4. Total and permanent disability

The part most people miss: “lump-sum distribution” means your entire 401(k) balance — not just the stock. But here’s the workaround: you can split the distribution. Distribute the employer stock in-kind to a taxable brokerage account (NUA treatment applies) and simultaneously roll the remaining non-stock assets ($420,000 of mutual funds) directly to a traditional IRA (tax-free rollover). Both happen in the same calendar year. This is the standard NUA execution — stock out, everything else rolled.

You cannot cherry-pick specific lots of employer stock. All employer securities in the plan must come out in-kind for NUA to apply.

Side-by-side: NUA distribution vs. full IRA rollover on $300,000

Same $300,000 of employer stock, same $50,000 basis, same $250,000 NUA. Our Cincinnati retiree is 62, married filing jointly, with $80,000 of other income (spouse’s part-time work + small pension).

Path A: NUA distribution to taxable brokerage

Path B: Full IRA rollover, withdrawn over 10 years at 24% bracket

NUA saves $13,000 at a 24% bracket. At a 32% bracket (taxable income $394,601–$501,050 MFJ in 2026), the IRA path costs $80,000 on the $250,000 — and NUA saves $33,000. At 35%, the gap widens to $40,500.

The bracket multiplier

The higher your projected ordinary income rate in retirement, the more NUA saves. Below the 22% bracket, the gap narrows enough that the loss of tax-deferred growth may outweigh the rate arbitrage — run the numbers before assuming NUA is always right.

The 10% early withdrawal penalty: it hits the basis, not the NUA

If our retiree were 56 instead of 62, the cost-basis portion ($50,000) would be subject to the 10% early withdrawal penalty under IRC §72(t) — an additional $5,000. The $250,000 NUA is not subject to the penalty because it’s not included in the taxable distribution amount at the time of distribution.

For someone separating from service before 59½, this matters: the penalty applies only to the basis, not to the appreciation. On a $50,000 basis, that’s $5,000 — painful but manageable relative to the $13,000–$45,000 in NUA tax savings. On a $200,000 basis with only $100,000 of NUA, the $20,000 penalty significantly erodes the benefit. This is another reason NUA works best when the basis-to-NUA ratio is low.

Exception: the Rule of 55 (IRC §72(t)(2)(A)(v)) exempts distributions from the employer plan you just left if you separate from service during or after the year you turn 55. This eliminates the 10% penalty on the cost-basis portion entirely. Our 62-year-old retiree clears this threshold with room to spare.

What happens after distribution: selling the NUA shares

Once the employer stock lands in your taxable brokerage account, you have decisions to make:

• Sell immediately: the NUA ($250,000) is taxed at long-term capital gains rates. No additional appreciation, no holding-period requirement for the NUA portion. You owe $47,000 (15% + 3.8% NIIT) and have $253,000 in cash to diversify.
• Hold and sell later: if the stock appreciates further, post-distribution gains are taxed based on your actual holding period. Hold 12+ months after distribution and post-distribution gains qualify for LTCG. Sell within 12 months and the post-distribution gain is short-term (ordinary income). The NUA portion is always LTCG regardless.
• Hold until death: your heirs get a step-up in basis on the post-distribution appreciation under IRC §1014, but the NUA itself does NOT receive a step-up. The $250,000 NUA remains taxable to your heirs as LTCG when they sell.

The concentration risk warning: distributing $300,000 of a single employer’s stock to a taxable account and holding it is the same concentration risk problem that hits RSU holders. You already depend on this company for your pension, retiree health benefits, and deferred comp. Adding a $300,000 undiversified stock position on top of that is doubling down. I’d sell and diversify within 60 days of distribution in most cases — the NUA tax treatment doesn’t require you to hold the shares.

When NUA is the wrong call

NUA is not universally better than a rollover. Three scenarios where the IRA rollover wins:

1. Low appreciation relative to basis

If your employer stock has a $200,000 basis and only $100,000 of NUA on a $300,000 position, the tax savings from the LTCG rate on $100,000 is modest ($5,000–$14,000 depending on bracket) — and you lose decades of tax-deferred compounding inside the IRA. The NUA strategy pulls the trigger on $200,000 of ordinary income now (the basis) instead of deferring it. When the basis is high relative to the NUA, that acceleration cost exceeds the rate arbitrage on the appreciation.

Rule of thumb: NUA typically makes sense when the NUA is at least 3–4× the cost basis. Below that, model both paths before committing.

2. Current-year income already pushes you into a high bracket

The $50,000 basis hits your ordinary income in the distribution year. If you’re already at $190,000 of taxable income (MFJ), adding $50,000 pushes you from the 24% bracket into the 32% bracket (threshold: $206,700 MFJ in 2026). That extra $33,300 above the threshold is taxed at 32% instead of 24% — an extra $2,664 in federal tax. For large basis amounts ($100K+), the bracket jump on the basis portion can significantly reduce NUA’s net benefit.

Timing lever: if you have a qualifying event this year but your income is unusually high, you may have until December 31 of a future calendar year to take the lump-sum distribution (as long as it’s after the qualifying event). Waiting until a lower-income year to execute the distribution can save thousands on the basis-portion tax.

3. You need decades of tax-deferred growth

NUA pulls money out of the tax-deferred wrapper. If you’re 45, just hit the age-59½ trigger, and won’t need this money for 20+ years, the compounding advantage of leaving the stock inside the 401(k) or IRA may exceed the rate arbitrage. Every year the stock grows inside the IRA, that growth is tax-deferred. Outside the IRA, dividends and any rebalancing generate annual tax drag.

For someone within 5–10 years of needing the money (our 62-year-old retiree), the deferral advantage is minimal. For a 45-year-old with 20 years of compounding ahead, the IRA rollover often wins even at a higher eventual tax rate.

NUA execution checklist

If NUA makes sense for your situation, the execution has zero margin for error. Miss a step and you lose the NUA treatment permanently.

1. Confirm a qualifying event occurred. Separation from service, age 59½, disability, or death. Document the date.
2. Open a taxable brokerage account at the custodian that will receive the employer stock. Fidelity, Schwab, and Vanguard all handle NUA distributions regularly.
3. Request a lump-sum distribution from the plan administrator. Specify: employer stock distributed in-kind to the taxable brokerage account; all other assets rolled directly (trustee-to-trustee) to a traditional IRA. Both must happen in the same calendar year.
4. Verify the 1099-R coding. The plan should issue a Form 1099-R with Box 6 showing the NUA amount. Box 1 shows the total distribution; Box 2a shows the taxable amount (cost basis only). If Box 6 is blank or wrong, contact the plan administrator immediately — incorrect 1099-R coding is the #1 NUA execution failure.
5. Do NOT roll the employer stock to an IRA. Even a momentary rollover of the stock into an IRA kills the NUA treatment permanently. The stock must go directly to a taxable account.
6. Sell and diversify. Once shares are in the taxable account, you can sell at any time. The NUA is taxed at LTCG rates regardless of holding period. Post-distribution gains need 12+ months for LTCG treatment.

IRMAA and Medicare: the NUA income spike

The $50,000 basis hits your MAGI in the distribution year. If you sell the NUA shares in the same year, the $250,000 of LTCG also hits MAGI. Total MAGI impact: $300,000 in a single year.

For a retiree on Medicare (65+), that MAGI spike triggers IRMAA surcharges two years later (IRMAA uses a 2-year lookback). At $300,000+ MAGI (MFJ), Part B premiums jump from the base $185/month to $480.90/month — an extra $591.80/month per couple ($7,102/year). Part D adds another $57.00/month each ($1,368/year total).

The play: distribute the stock in one year (triggering ordinary income on the $50,000 basis), then sell the shares in a different year to spread the MAGI impact across two calendar years. This can keep each year’s MAGI below the higher IRMAA tiers. At 62, you’re not on Medicare yet — which makes this the ideal age for NUA execution. The MAGI spike at 62 doesn’t affect Medicare premiums until 64 (lookback), and if your income normalizes by then, the surcharge may be minimal or avoidable.

NUA vs. Roth conversion: competing strategies for the same problem

Both NUA and Roth conversions solve the same problem: getting pre-tax retirement assets into a more tax-efficient wrapper before RMDs force withdrawals at ordinary income rates. The difference:

They’re not mutually exclusive. The optimal play for our Cincinnati retiree: use NUA to pull the $300,000 of employer stock into a taxable account at LTCG rates, roll the remaining $420,000 to a traditional IRA, then execute Roth conversions on the IRA balance during the gap years before RMDs (age 62–75 under SECURE 2.0 §107 for those born 1960+). She gets LTCG treatment on the stock appreciation AND fills her low-bracket years with Roth conversions on the non-stock balance. Two strategies, two pools of assets, complementary tax outcomes.

The estate angle: NUA shares vs. IRA at death

The step-up rules for NUA shares are worse than most people expect:

• NUA at death: the NUA itself ($250,000) does NOT get a step-up under IRC §1014. It remains taxable as LTCG to the heir. Only post-distribution appreciation receives the step-up.
• IRA at death: no step-up either — inherited traditional IRA balances are income in respect of a decedent (IRD), taxed as ordinary income to the beneficiary under the 10-year rule.

Neither option gets a clean step-up. But the NUA path has a slight edge: the heir pays LTCG rates on the NUA (15–20% + 3.8% NIIT) vs. ordinary income rates on inherited IRA distributions (potentially 24–37% depending on the heir’s income). For high-income heirs, the NUA path produces a lower estate tax burden on the same underlying appreciation.

Exception: if you plan to leave assets to charity, roll everything to the IRA. Charitable beneficiaries pay no income tax on inherited IRA distributions — the ordinary income rate is irrelevant. NUA shares donated during your lifetime lose the LTCG advantage (the charity doesn’t pay tax either way, but you don’t get a deduction for the NUA portion).

Decision framework: NUA vs. full IRA rollover

The bottom line for the Cincinnati retiree

$300,000 of employer stock. $50,000 basis. $250,000 NUA. Age 62, married filing jointly, 24% projected bracket in retirement.

NUA path: $12,000 ordinary income tax on the basis + $47,000 LTCG + NIIT on the appreciation when sold = $59,000 total. IRA rollover path: $72,000 at 24% ordinary income over 10 years = $72,000 total. At higher brackets, the gap widens to $33,000–$45,000.

She distributes the stock in-kind to a Schwab taxable account, rolls the $420,000 of mutual funds to a traditional IRA, sells the employer stock within 60 days to diversify, and begins Roth conversions on the IRA balance in the 22% bracket from 63 to 74. The NUA saves her $13,000+ in federal tax on the stock. The Roth conversions save her another $30,000–$50,000 in lifetime tax on the IRA balance. Two strategies, one separation event, six-figure cumulative tax savings.

Get the 1099-R right. Don’t let the stock touch an IRA, even for a day. And have a CPA who has handled NUA distributions before — not one who has to look it up. The execution window is narrow and the stakes are five figures.