If you’re approaching retirement and hold employer stock in your 401(k) or company retirement plan, there’s a little-known tax strategy that could save you significantly in taxes: Net Unrealized Appreciation (NUA).
Many people assume rolling over their entire 401(k) into an IRA is the default best option—but when it comes to company stock, there’s another potential route that’s worth considering.
What is NUA?
Net Unrealized Appreciation (NUA) refers to the growth in value of company stock held in your workplace retirement plan. If you meet specific requirements, this growth can be taxed at the long-term capital gains rate rather than ordinary income tax rates—which is a big difference for many retirees.
How NUA Works?
- You retire or leave your job and own company stock in your 401(k).
- Instead of rolling everything into an IRA, you:
- Take a lump-sum distribution of the entire 401(k in one tax year).
- Transfer the company stock “in-kind” to a brokerage account.
- Roll over the remaining assets (mutual funds, cash, etc.) into an IRA.
- You pay ordinary income tax on the cost basis of the stock (what you originally paid for it).
- When you sell the stock later in your brokerage account, the appreciation (NUA) is taxed at long-term capital gains rates—even if you sell the next day.
Why It Matters
Let’s say your company stock is worth $200,000, but your cost basis is only $50,000:
- If you roll it all into an IRA, you’ll pay ordinary income tax on the full $200,000 when withdrawn.
- With NUA, you pay ordinary tax only on the $50,000 cost basis now, and the $150,000 in appreciation is taxed at long-term capital gains rates later.
For many, this results in a significantly lower overall tax bill, especially if they’re in a high income bracket.
Is NUA Right for You?
NUA isn’t for everyone. Here are a few key things to consider:
✅ You have highly appreciated company stock in your 401(k)
✅ You’re separating from service due to retirement, disability, or after age 59½
✅ You don’t need to access all your retirement funds immediately
✅ You want to reduce your ordinary income tax burden over time
But be cautious—NUA must be executed properly, and once you roll over the stock into an IRA, the opportunity is lost.
