If you hold highly appreciated employer stock inside a 401(k), there’s a little-known IRS rule that lets you pay capital gains rates instead of ordinary income rates on a large portion of that value.
Net Unrealized Appreciation (NUA) Tax Strategy
Most people assume that every dollar they pull from a traditional 401(k) will be taxed as ordinary income, which can be up to 37% at the federal level, plus state taxes. But for those who hold appreciated company stock inside their retirement plan, there’s a powerful exception buried in the tax code: Net Unrealized Appreciation, or NUA.
Used correctly, NUA lets you take a portion of your 401(k)’s value and pay long-term capital gains rates — as low as 0%, and typically 15% to 20% — rather than ordinary income rates. The difference can be significant. Here’s exactly how it works.
Who Could This Impact?
Individuals who work at a publicly traded company could benefit from this strategy. If you own a portion of the company’s common stock in your 401(k) and that stock has appreciated over the time you have owned it, you should consult a tax professional and a CFP®.
What is Net Unrealized Appreciation?
NUA is the difference between the original cost of the employer stock when it was purchased in your retirement plan and its current fair market value at the time of distribution. In plain terms, it’s the growth in that stock sitting in your 401(k) that you haven’t been taxed on yet.
| EXAMPLE: Your company stock was purchased inside your 401(k) at an average of $10/share. It’s now worth $80/share. The $70/share of growth is your NUA. Under this strategy, that growth could be taxed at capital gains rates, not ordinary income. |
How the Process Works
The NUA strategy requires a specific sequence of events and you should consult a CFP® professional who is familiar with the process. Miss any of these steps, and the tax treatment doesn’t apply.
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QUALIFYING TRIGGERING EVENT |
You must have a legitimate reason to take a distribution: separating from service (retiring or leaving the company), reaching age 59½, total disability, or death. |
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LUMP-SUM DISTRIBUTION |
The entire account balance must be distributed (rolled over) within a single tax year. You can’t cherry-pick just the stock; the whole 401(k) plan must be liquidated or transferred. |
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IN-KIND STOCK TRANSFER |
The company stock must be transferred as actual shares — not sold and then moved as cash — to a taxable brokerage account. Remaining non-stock assets can (and usually should) be rolled into an IRA to preserve their tax-deferred status. |
How the Tax Split Works
When you execute an NUA transfer, the value of the stock is divided into two distinct tax buckets at the time of distribution:
TAXED NOW:
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TAXED LATER:
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| The original purchase price paid for the shares inside the plan.
Ordinary income tax is owed on this amount in the year of distribution. |
The appreciation above the cost basis at the time of transfer.
Not taxed at distribution — only when you sell. When you do sell, it’s taxed at long-term capital gains rates, regardless of how long you hold the shares after the transfer. |
POST-TRANSFER GAINS |
| The additional appreciation after the transfer occurs is subject to the standard capital gains treatment. |
Side-by-Side Tax Comparison
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STANDARD 401(K) WITHDRAWAL |
NUA STRATEGY | |||
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TAX ON COST BASIS |
Ordinary income |
Ordinary income |
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TAX ON GROWTH |
Ordinary income |
Long-term capital gains |
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RATE ON GROWTH |
Up to 37% |
0%, 15%, or 20% |
Estimate Your Potential Savings
The following example provides a simplified illustration of NUA in action. Please be sure to consult an advisor and your tax accountant to discuss your specific situation.
| Total company stock value: | $500,000 |
| Cost basis: | $100,000 |
| Your ordinary income tax rate: | 32% |
| Your capital gains tax rate: | 15% |
STANDARD WITHDRAWAL TAX |
NUA STRATEGY TAX |
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$160,000100% taxed as income |
$92,000Cost basis taxed at ordinary income tax rate |
POTENTIAL TAX SAVINGS: $68,000
When NUA Makes the Most Sense
The strategy is most compelling when the cost basis is low relative to the current value, meaning most of the stock’s value is in the NUA column. The higher the ratio of appreciation to cost basis, the more you benefit from the capital gains rate differential.
That said, it isn’t the right move for everyone. Here’s a balanced look at the key considerations:
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IMMEDIATE TAX BILL |
CONCENTRATION RISK |
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| You owe ordinary income tax on the cost basis in the year of distribution. This is unavoidable, and it’s real cash out the door compared to a standard rollover, which defers everything. | To preserve the NUA tax treatment, the shares must remain as-is until sold. Holding a large single-stock position creates portfolio risk that many investors underestimate. |
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NO RMD PRESSURE |
IMMEDIATE LONG-TERM STATUS |
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| Once the stock is in a taxable brokerage account, it’s exempt from Required Minimum Distributions, giving more flexibility in retirement cash flow and estate planning. | The NUA portion qualifies for long-term capital gains rates the moment you sell, regardless of how long you hold the shares after transfer. Day one or five years later: same rate. |
The Key Questions to Ask First
Before anything else, you need to know your cost basis inside the plan, which your plan administrator can provide. If the cost basis is already a large percentage of the current value, the math often doesn’t work in NUA’s favor, because too much of the value will be taxed at ordinary rates regardless.
If the cost basis is low compared to the stock’s current value and you’re sitting on substantial appreciation, NUA can be one of the most underutilized tax strategies available to retiring employees invested in their company’s stock in their 401(k).
Is NUA Worth Exploring in Your Situation?
Every situation is different. The right answer depends on your cost basis, income tax bracket, estate plan, and tolerance for concentrated equity positions. Reach out to a Detalus Team member, and we would be happy to help you explore the numbers.