NUA on $600K Company Stock: When the Basis Kills It

Marcus, 61, is retiring from a Texas semiconductor firm with $600,000 of employer stock sitting inside his 401(k). His cost basis — what the plan paid for those shares over 22 years of payroll purchases and matching — is $400,000. He files married filing jointly, has about $150,000 of other taxable income from his spouse’s salary and a pension, and lives in a state with no income tax. His advisor mentioned NUA, the strategy everyone raves about. Marcus assumed it was an automatic win. It isn’t. At a 67% basis ratio, the rollover beats NUA — and the gap is roughly $40,000 of after-tax value.

The reason is the part of the NUA story that gets buried: NUA only helps on the appreciation above your basis. On Marcus’s position that appreciation is just $200,000. The other $400,000 — the basis — gets taxed as ordinary income the year he distributes, all at once. That upfront bill is what kills high-basis NUA.

What NUA actually does — and what it doesn’t

Net unrealized appreciation is a tax election available when you take a qualifying lump-sum distribution of employer stock from a qualified plan (a 401(k), ESOP, or profit-sharing plan). Instead of rolling the stock into an IRA, you move the actual shares into a taxable brokerage account. Here is the trade, governed by IRC §402(e)(4):

• The cost basis is taxed as ordinary income now — in the year of the distribution, reported on Form 1099-R.
• The NUA (market value minus basis) is not taxed at distribution. When you later sell the shares, that appreciation is taxed at long-term capital gains rates — automatically long-term, regardless of how long you actually hold the shares after distribution.
• Any appreciation after distribution follows normal capital-gains holding-period rules.

The magic only works when the NUA is large relative to the basis. Picture an employee who bought company stock at $4/share that’s now worth $80 — basis is 5% of value, NUA is 95%. That person converts almost the entire position from ordinary-income treatment (up to 37%) to LTCG treatment (15%–20%). NUA is a windfall.

Marcus is the opposite. His basis is 67% of value. He converts only 33% of the position to capital-gains treatment, and he pays full ordinary tax on the other 67% immediately. The arbitrage is too thin to cover the upfront cost.

The upfront ordinary tax on $400K of basis

Marcus already has $150,000 of MFJ taxable income before the NUA distribution. Stacking the $400,000 of basis on top pushes that ordinary income from $150,000 up to $550,000 — running through the 24%, 32%, and into the 35% MFJ brackets for 2026.

Roughly $109,000 of federal tax is due the year Marcus elects NUA — on the basis alone, before he has sold a single share. The 2026 MFJ brackets that drive this: 22% on $96,951–$206,700, 24% on $206,701–$394,600, 32% on $394,601–$501,050, and 35% on $501,051–$751,600. Because the basis stacks on top of his existing $150,000 of income, only $56,700 sits in the 22% bracket — the other $343,300 climbs through the 24%, 32%, and 35% brackets, and the top $48,950 is taxed at 35%, far above the 24% rate people casually assume.

The capital-gains savings on the $200K of NUA

Now the upside. The $200,000 of NUA, when Marcus sells, is taxed at long-term capital-gains rates under IRC §1(h). With $150,000 of base income plus the gain, his MFJ taxable income lands well above the $600,050 threshold where the 20% LTCG rate begins — and his MAGI is over the $250,000 MFJ NIIT threshold, so the 3.8% net investment income tax under IRC §1411 applies too.

If instead that $200,000 had stayed in the IRA and come out as ordinary income at, say, a 24% blended rate in retirement, the tax would have been about $48,000. So the NUA election saves Marcus essentially nothing on the appreciation in this scenario — the 23.8% effective LTCG-plus-NIIT rate is almost identical to his future ordinary rate on that slice. Meanwhile he paid roughly $109,000 up front. That is the trap.

NUA versus rollover: the head-to-head on $600K

The decisive line is “capital working after year one.” NUA forces Marcus to hand the IRS roughly $109,000 immediately to lock in a capital-gains rate that, at his income, barely undercuts his future ordinary rate. The rollover keeps the entire $600,000 compounding. Over a 10–15 year retirement horizon, the $109,000 head start on tax-deferred growth is worth far more than the few thousand dollars of rate arbitrage NUA delivers on a 33%-NUA position.

The basis-ratio breakeven

The whole decision collapses to one number: what fraction of the stock’s value is basis? The table below holds the $600,000 value constant and varies the basis, showing why the answer flips.

Below roughly 40% basis, NUA almost always wins because the ordinary tax on basis is small and the LTCG conversion is large. Above roughly 55% basis, the rollover usually wins because the upfront ordinary tax dominates. The exact crossover slides with your marginal ordinary rate (a 24% filer has a higher tolerance for basis than a 35% filer) and with whether NIIT applies to the NUA when you sell. Marcus, at 67%, is well past the line.

What most people miss: the “NUA always wins” myth

The most common error is treating NUA as a free conversion of ordinary income to capital gains. It is not free. You prepay ordinary tax on 100% of the basis, in a single year, often spiking yourself into the 32% or 35% bracket and possibly triggering IRMAA Medicare surcharges two years later. Three things people overlook:

1. The basis is taxed at your marginal rate, not your average rate. Because the basis stacks on top of your other income, the last dollars are taxed at your top bracket. On $400K of basis, $155,400 of it for Marcus climbs into the 32% and 35% brackets — the top $48,950 is taxed at the full 35%, not the 24% rate people quote on the whole position.
2. High-income retirees don’t get a big LTCG discount. If your income puts the NUA into the 20% LTCG bracket (MFJ taxable income over $600,050) and adds 3.8% NIIT, your effective 23.8% rate on the appreciation is close to the ordinary rate you’d pay on IRA withdrawals in a moderate bracket. The arbitrage shrinks exactly when the position is large.
3. The IRMAA and one-year income spike are real costs. Adding $400K of basis to Marcus’s $150K base lifts 2026 MAGI to about $550K MFJ — into the $386K–$750K IRMAA tier, where 2028 Medicare runs $591.90/mo Part B plus a $78.60 Part D surcharge per spouse (vs. the $185 base premium), per CMS’s two-year MAGI lookback. A rollover avoids the spike entirely.

NUA is a genuinely powerful tool — for low-basis, deeply-appreciated positions. The error is applying it reflexively to every block of company stock without running the basis ratio.

The RMD angle on the rollover path

Choosing the rollover does load future required minimum distributions. Marcus, born in 1965, falls under the SECURE 2.0 §107 rule that sets his first RMD at age 75. A $600,000 IRA growing at a modest rate could be $850,000+ by 75, and the first-year RMD divisor (about 26.5 at 73, lower at 75) pulls out roughly 4% — taxed as ordinary income. That is a real future cost of the rollover.

But two levers blunt it. First, Marcus has a long runway (age 61 to 75) to execute partial Roth conversions in lower-income years, shrinking the pre-tax balance before RMDs begin. Second, even with RMDs, spreading the income over many years at 22%–24% brackets beats recognizing $400K of basis in a single 35%-bracket year. The rollover’s RMD drag is a multi-year trickle; NUA’s tax hit is a one-year flood.

Can you split the difference? Partial NUA

Yes — and for borderline cases it’s the smart play. The mechanics: you must still take a qualifying lump-sum distribution of the entire 401(k) balance in one tax year after a triggering event (separation from service, reaching 59½, disability, or death). But you can then direct the highest-basis lots into a rollover IRA and apply NUA treatment only to the lowest-basis lots moved to a taxable brokerage account.

• Roll over the high-basis shares (those bought near today’s price) — no ordinary tax, full tax deferral.
• Take NUA only on the legacy low-basis shares (bought at $4–$10 a share years ago) — small ordinary tax on basis, big LTCG conversion.

If Marcus had a mix — some shares at a $5 basis and some at a $70 basis — he could NUA the $5 shares and roll the $70 shares. The IRS permits this lot-selection because basis is tracked per share. What you cannot do is a partial-balance distribution: NUA requires the full plan balance to leave in one lump-sum year, or the election is void.

The decision lever

Compute your basis ratio before anything else. Pull your plan’s cost-basis statement, divide basis by current market value, and read the result:

• Under 40% basis: NUA almost certainly wins — run the lump-sum distribution and move the shares to a brokerage.
• 40%–55% basis: breakeven zone — model it both ways with your actual income, state, and IRMAA exposure, and consider partial NUA on the lowest lots only.
• Over 55% basis — like Marcus at 67%: roll the whole position to an IRA. The upfront ordinary tax on basis is too large to recover, and keeping the full $600,000 compounding tax-deferred beats the thin capital-gains arbitrage.

Marcus rolls the entire $600,000 into an IRA, owes nothing this year, diversifies out of his employer’s stock inside the IRA tax-free, and starts a Roth-conversion ladder in his low-income early-sixties to defang the future RMDs. NUA was the wrong tool for his high-basis position — and the basis ratio told him so before he wrote a $109,000 check to the IRS he didn’t have to write.