Tax strategy · Explainer

Net Unrealized Appreciation:
a strategy for company stock in a 401(k).

READ3 min·UPDATED·APPLIES TOUnited States·LEVELAdvanced
For 401(k) holders with appreciated company stock. Sources are listed at the bottom of the page; check their dates before acting.

If you have company stock in your 401(k) with significant appreciation, NUA can let you pay long-term capital gainscapital gainsThe profit from selling an asset for more than you paid for it. Taxed differently depending on how long you held the asset. rates instead of ordinary income on that appreciation, saving potentially hundreds of thousands in taxes. This is complex. Consult a CPA.

This page covers US-specific accounts and tax law. Outside the US? NUA is a rule of the US tax code for employer stock in a 401(k) or similar qualified US plan, so it does not carry over to accounts like the ISAIndividual Savings Account (ISA)A UK tax-advantaged account where contributions are post-tax but all growth and withdrawals are tax-free.Full definition in the UK, TFSATax-Free Savings Account (TFSA)A Canadian tax-advantaged account where contributions are post-tax but all growth and withdrawals are tax-free.Full definition/RRSPRegistered Retirement Savings Plan (RRSP)A Canadian tax-deferred retirement account; contributions reduce taxable income and growth is tax-deferred until withdrawal.Full definition in Canada, or Super in Australia.

READ FIRST

A mistake in executing an NUA distribution can disqualify the entire strategy. Consult a CPA or tax attorney for every significant NUA event. Not financial or tax advice.

Short answer

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 basiscost basisWhat you originally paid for an asset. Used to calculate how much profit (or loss) you made when you sell.Full definition 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, or death; disability counts only for the self-employed) ×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 ↗ Source 1 in the list belowDetailed 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. Under age 59.5, it also owes the 10% early-distribution tax unless an exception applies, such as leaving the employer in or after the year you turn 55.
  • Appreciation above cost basis (the NUA): taxed as long-term capital gains when you sell. Even if you sell immediately.

The math

EXAMPLE
  • 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
Standard rollover to IRAIndividual Retirement Account (IRA)A retirement account with tax advantages and eligibility rules. Traditional IRA contributions may be deductible; taxable withdrawals generally enter income. Roth contributions use after-tax money, and qualified Roth withdrawals are tax-free.Full definition:

All $100,000 taxed as ordinary income when eventually withdrawn. At 32% bracket: $32,000 tax.

NUA strategy:

$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.

Same $100,000 of stock, $13,600 less tax
What the $100,000 is taxed as
Rollover to IRAtaxed when withdrawn
$100,000 at 32%
NUA strategybasis now, NUA when sold
$20,000$80,000 of NUA at 15%
$0$100,000 of stock
Tax owed
Rollover to IRA$32,000 total
$32,000
NUA strategy$18,400 total
$6,400$12,000$13,600 saved
$0$32,000 of tax
Taxed as ordinary income, 32%Taxed as long-term capital gains, 15%Tax NUA avoids
With NUA, only the $20,000 cost basis is taxed as ordinary income. The $80,000 of NUA is taxed at the 15% long-term capital gains rate instead, so the bill drops from $32,000 to $18,400, a $13,600 saving at this scale.

When NUA makes sense

YES, CONSIDER NUA
  • Significant appreciation (large NUA relative to basis)
  • Marginal income rate significantly exceeds your LTCGLong-Term Capital Gains (LTCG)Profit from selling an asset held over one year, taxed at lower preferential rates than ordinary income.Full definition rate
  • Willing to sell the stock within a reasonable horizon (staying fully concentrated defeats the purpose)
NO, NOT WORTH IT
  • Small amount of employer stock
  • High cost basis (little NUA relative to basis)
  • Your ordinary rate in retirement is close to your LTCG rate
  • 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.

Where to go from here

Do next

Tax Strategy

The full hub of advanced tax-reduction strategies beyond NUA.

Read next

Concentrated Stock

Diversifying employer stock before or instead of using NUA.

Explore further

Sources

Verify badges in the text link to these sources. Figures, rates and rules change: check each source’s date before acting on it.

  1. Internal Revenue Service, IRS Publication 575 ↩

Last updated . Not financial or tax advice. Consult a CPA for NUA execution. Disclosures · How pages are reviewed

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