Net Unrealized Appreciation:
the 401(k) strategy most miss.
If you have company stock in your 401(k) with significant appreciation, NUA can let you pay long-term capital gains rates instead of ordinary income on that appreciation, saving potentially hundreds of thousands in taxes. This is complex. Consult a CPA.
NUA is one of the most consequential and error-prone tax decisions in retirement planning. A single mistake in executing the distribution can disqualify the entire strategy. Every significant NUA event deserves a CPA or tax attorney. Not financial or tax advice.
If your 401(k) holds employer stock that has appreciated significantly, NUA lets you take a lump-sum distribution of that stock in-kind. The cost basis is taxed as ordinary income in the distribution year. All the appreciation, the NUA, is taxed as long-term capital gains when you eventually sell, even if you sell immediately after the distribution.
How NUA works
Requirements
- Must have employer stock in your 401(k)
- Must take a qualifying lump-sum distribution (separation from service, age 59.5, disability, or death) verify×DON'T TRUST, VERIFYClaim: NUA requires a qualifying lump-sum distribution of the entire plan balance in a single tax year.Verify at: IRS Publication 575 ↗Detailed NUA rules in Publication 575.
- The employer stock must be distributed in-kind (as shares), not sold and distributed in cash
Tax treatment
- Cost basis of the stock (what the 401(k) paid for it): taxed as ordinary income in the distribution year.
- Appreciation above cost basis (the NUA): taxed as long-term capital gains when you sell. Even if you sell immediately.
The math
- 401(k) holds 1,000 shares of employer stock
- Cost basis in plan: $20/share = $20,000
- Current price: $100/share = $100,000
- NUA: $80,000
All $100,000 taxed as ordinary income when eventually withdrawn. At 32% bracket: $32,000 tax.
$20,000 ordinary income tax at 32%: $6,400. $80,000 long-term capital gains at 15%: $12,000. Total tax: $18,400. Savings vs standard rollover: $13,600 at this scale. At larger stock positions and higher tax brackets, the savings can run into six figures.
When NUA makes sense
- Significant appreciation (large NUA relative to basis)
- Marginal income rate significantly exceeds your LTCG rate
- Willing to sell the stock within a reasonable horizon (staying fully concentrated defeats the purpose)
- Small amount of employer stock
- Low cost basis AND low retirement income (ordinary and LTCG rates converge)
- You do not plan to sell the stock
The executional details matter: full plan balance distributed in same year, employer stock in-kind, non-stock assets rolled to IRA, all within the same tax year. Miss any detail and the NUA treatment is lost. This is CPA territory.
Last updated 2026-04-22. Not financial or tax advice. Consult a CPA for NUA execution.
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