If you hold your employer's stock inside a 401(k) or ESOP, the tax code gives you a one-time choice when you leave the plan. You can roll everything into an IRA and pay ordinary income tax on every dollar you later withdraw. Or you can take the company shares out in kind and use the net unrealized appreciation (NUA) rules to have most of the growth taxed as a long-term capital gain.
How Does Net Unrealized Appreciation Work?
NUA splits the value of your employer stock into two pieces and taxes each one differently. The plan's cost basis is taxed now as ordinary income. The NUA is taxed later as a long-term capital gain.
Three numbers drive the whole calculation:
- Cost basis: what the plan paid for the shares. This is taxable as ordinary income in the year of the distribution.
- NUA: the market value on the distribution date minus the cost basis. This is not taxed until you sell.
- Post-distribution growth: any gain after the shares land in your brokerage account. This is short or long term based on how long you hold the shares after the distribution.
The NUA itself is always long-term, even if you sell the day after the distribution. Your plan reports both numbers on Form 1099-R. The NUA appears in box 6, and the taxable cost basis appears in box 2a.
Who Qualifies for NUA Treatment?
Full NUA treatment requires a lump-sum distribution, and the rules for that are strict. (A narrow exception covers shares bought with your own after-tax contributions.) Under IRC 402(e)(4), all of these must be true:
- One tax year. Your entire balance in all of that employer's qualified plans of the same kind is paid out within a single calendar year.
- After a triggering event. The trigger is separation from service (for employees), reaching age 59 and a half, death, or disability (for self-employed people).
- Shares in kind. The stock itself moves to a taxable brokerage account. If the plan sells the shares and hands you cash, the NUA is gone.
You do not have to send every asset to the brokerage account. The usual move is to take the company stock in kind and roll the mutual funds and cash straight into an IRA in the same year. Both steps count toward emptying the account.
Rolling to an IRA Ends the NUA Option
CautionOnce employer stock is rolled into an IRA, the NUA rules no longer apply. Every dollar that comes out of the IRA later is ordinary income. This mistake often happens when someone consolidates old 401(k) accounts into one IRA without checking for company stock first.
How Much Can NUA Save Compared With an IRA Rollover?
The savings come from the gap between ordinary income rates (up to 37 percent) and long-term capital gain rates (15 or 20 percent for most people who use NUA). The lower your cost basis compared with the stock's value, the bigger the gap.
Example: $600,000 of Company Stock
CalculationA married couple, both 60, are retiring. The 401(k) holds $600,000 of employer stock with a plan cost basis of $90,000, plus $400,000 in mutual funds. Assume a 24 percent ordinary rate and a 15 percent capital gain rate for illustration.
- NUA path: the $90,000 cost basis is ordinary income now, about $21,600 of tax.
- The $510,000 of NUA is taxed at 15 percent when sold, about $76,500.
- NUA total: about $98,100.
- IRA rollover path: all $600,000 is ordinary income as it is withdrawn, about $144,000 at 24 percent.
- Difference: about $45,900 in favor of NUA. At a 32 percent ordinary rate the gap grows to about $86,700.
The $400,000 of mutual funds rolls into an IRA on both paths, so it does not change the comparison.
The 2026 long-term capital gain brackets (Rev. Proc. 2025-32) matter when you plan the sales. The 15 percent rate starts above $49,450 of taxable income for single filers and $98,900 for joint filers. The 20 percent rate starts above $545,500 single and $613,700 joint. Selling the shares over several years can keep more of the NUA in the 15 percent bracket.
When Does NUA Not Make Sense?
NUA works best with low-basis stock and a nearby need for the money. It loses its edge in a few common situations:
- High cost basis. If the plan paid close to today's value, you pay ordinary tax up front on most of it and gain little.
- Young age. Someone decades from retirement may get more from years of tax-deferred growth in an IRA.
- No cash for the tax bill. The ordinary tax on the cost basis is due for the distribution year, and the shares stay invested unless you sell some.
- Concentration risk. Holding a large single-stock position for the tax benefit is an investment decision as well as a tax one.
NUA is not all or nothing. You can take some shares out in kind and roll the rest into the IRA. A few plans track the cost of each share lot and let you take only the lowest-basis lots. Most use one average cost for all your shares, so ask the plan administrator which method yours uses.
What Are the Tax Rules in the Year of the Distribution?
The cost basis is ordinary income on your return for the year the shares come out. If you are under 59 and a half, the 10 percent early withdrawal tax applies to that cost basis unless an exception fits. The most common one is separation from service in or after the year you turn 55.
A few other rules apply in the distribution year:
| Item | How it works |
|---|---|
| Mandatory 20 percent withholding | Figured on the shares' cost basis plus any cash, and the plan collects it only from the cash and other property you receive |
| Required minimum distribution | Must be taken for the year before the rest of the account can be rolled over |
| Net investment income tax | The NUA gain is exempt under Treas. Reg. 1.1411-8(b)(4)(ii); growth after distribution is not |
| Election out | You can choose to include the NUA in income now, though few people do |
Check your return software when you sell. Some programs add the 3.8 percent tax to the full gain from the Form 1099-B by default, including the NUA portion that is exempt.
What Happens to NUA Stock When You Die?
NUA does not get a step-up in basis at death. The IRS treats it as income in respect of a decedent (Rev. Rul. 75-125), so your heirs owe long-term capital gain tax on the NUA when they sell. Growth after the distribution does get a stepped-up basis.
Death is also a triggering event. A beneficiary who inherits a 401(k) holding company stock can often take a lump-sum distribution and use the NUA rules too. That only works if the plan has not already been rolled into an inherited IRA.
What Mistakes Cost People the NUA Benefit?
Rolling the whole 401(k) into an IRA is a common mistake, and it ends the NUA option for good. Selling the shares inside the plan or splitting the payout across two tax years also kills it.
| Mistake | Result |
|---|---|
| Rolling the whole 401(k) into an IRA | NUA is lost permanently |
| Selling the shares inside the plan before distribution | Cash comes out, no NUA |
| Spreading the payout over two tax years | Not a lump sum, so the NUA deferral fails |
| A partial withdrawal in an earlier year after the trigger | That trigger may be used up; you may need a new one, such as turning 59 and a half |
| Software charging the 3.8 percent tax on the NUA | Overpaid tax on the sale |
For the bigger picture of the year you stop working, see our guide to tax planning for your first year of retirement. If you are already past 73, the 2026 RMD rules affect how the distribution year is sequenced.
Questions about whether NUA fits your company stock? Contact TS CPA for a free consultation. We respond within the same day.