Net Unrealized Appreciation (NUA): Convert Your 401(k) Company Stock to Long-Term Capital Gains

If you've accumulated $400,000 of employer stock in your 401(k) with a plan cost basis of $80,000, rolling it to an IRA means every dollar is eventually taxed as ordinary income — up to 37% federal. The NUA rule under IRC §402(e)(4) lets you take the stock in kind, pay ordinary income on the $80,000 cost basis only, and pay long-term capital gains rates (15–20%) on the $320,000 NUA when you sell. At the $1M–$5M level, this difference is worth $30,000–$80,000 in lifetime federal taxes. Most people roll everything over without knowing this option exists.

What Is Net Unrealized Appreciation?

Net unrealized appreciation (NUA) is the difference between the fair market value (FMV) of employer securities at the time of a lump-sum distribution and the plan's cost basis in those shares — the appreciation that built up while the stock sat inside your 401(k).

Under IRC §402(e)(4)(D), when you take a qualifying lump-sum distribution that includes employer securities distributed in kind, the NUA is excluded from gross income at the time of distribution. It is instead taxed as long-term capital gain when you eventually sell the shares — regardless of how long you hold them after distribution.¹

The plan's cost basis portion — what the plan paid for the shares over the years — is includible as ordinary income the year of distribution, just like any other 401(k) distribution.

The Three Tax Buckets

Compare to IRA rollover: the entire account balance — cost basis, NUA, and all post-rollover growth — becomes ordinary income when distributed. For someone in the 24%–32% bracket in retirement, the difference on the NUA portion alone is 4–17 percentage points per dollar.

Who Qualifies: The Lump-Sum Distribution Rules

NUA treatment is not available for partial withdrawals. A qualifying lump-sum distribution under IRC §402(e)(4)(B) requires:

1. The distribution includes the entire balance of all qualified plans of the same type from the same employer, distributed within a single taxable year.
2. The distribution is triggered by one of four qualifying events:
   • Attainment of age 59½
   • Separation from service (retirement, termination, or resignation)
   • Death of the plan participant
   • Disability (self-employed participants only)
3. The employer securities are distributed in kind — shares transferred to a taxable brokerage account, not liquidated for cash. Rolling the stock to an IRA voids the NUA election permanently.

The 10% Penalty and Age Exceptions

If you take a lump-sum distribution before age 59½, the 10% early withdrawal penalty (IRC §72(t)) applies to the cost basis portion only — not to the NUA. Because the NUA is excluded from income at distribution, the penalty cannot reach it.²

Age 55 separation exception: If you separate from service in or after the calendar year you turn 55, distributions from that employer's plan are entirely penalty-free — even before age 59½. This makes NUA planning practical for early retirees who separate at 55–58. Verify this exception applies to your specific plan type.

NIIT and State Tax Considerations

When you sell the NUA shares, the gain qualifies as long-term capital gain and is subject to the 3.8% Net Investment Income Tax if your MAGI exceeds $200,000 (single) / $250,000 (MFJ) under IRC §1411.³ At the $1M–$5M wealth level, NIIT usually applies — the calculator accounts for this automatically.

Most states do not differentiate between long-term capital gains and ordinary income, so the state tax advantage of NUA is primarily a federal one. However, if you live in a no-income-tax state (FL, TX, NV, WA, SD, WY, TN) or plan to relocate before the distribution, the federal LTCG advantage is captured in full. Relocating to a no-income-tax state before executing an NUA distribution is a meaningful coordination move for high-balance accounts.

NUA vs. IRA Rollover Calculator — 2026

Compare the total federal + state tax cost of taking company stock via NUA (pay ordinary income on cost basis now, LTCG on NUA at sale) vs. rolling the entire 401(k) to an IRA (defer everything, pay ordinary income at distribution).

Worked Example

Sarah, 62, is retiring after 25 years at a tech company. Her 401(k) holds 5,000 shares of company stock, plan cost basis $20/share, current FMV $80/share. She also has $0 in other income this year (early retirement).

• Cost basis total: 5,000 × $20 = $100,000
• NUA: 5,000 × ($80 − $20) = $300,000
• Total value: $400,000

NUA strategy (MFJ, $0 other income):

• Federal ordinary income on $100K cost basis: $11,828 (10% on first $23,850; 12% on next $73,100; 22% on last $3,050)
• No penalty (age 62 > 59½)
• Federal LTCG on $300K NUA: $30,165 (0% on first $98,900 stacked from $0 — MFJ 0% threshold; 15% on next $201,100)⁴
• NIIT on $300K NUA: $1,900 (3.8% on $50,000 excess above $250K MFJ threshold; MAGI = $300K)
• Total NUA tax: ~$43,893

IRA rollover (same $400K distributed at 24% marginal in retirement):

• Federal ordinary income: $400K × 24% = $96,000

NUA saves Sarah ~$52,100 in federal taxes on this position. The 0% LTCG bracket applies to the first $98,900 of NUA (stacked on $0 other income), amplifying the advantage beyond a simple "15% vs. 24%" comparison.

When NUA Makes Sense

1. High NUA ratio (>50% of value is NUA). The larger the share of value that converts from ordinary income to LTCG, the bigger the savings. A $20 basis on an $80 stock = 75% NUA ratio. A $70 basis on an $80 stock = 12.5% NUA ratio — usually not worth the complexity.
2. Low-income distribution year. You'll pay ordinary income tax on the cost basis in the year of distribution. Retiring mid-year, taking distributions in a year with no salary, or spreading other IRA withdrawals to a different year all reduce the marginal rate on the cost basis.
3. Plan to sell the stock relatively soon. If you'd hold the company stock indefinitely (never selling), deferral in an IRA with a step-up at death is often better. NUA is most compelling when you intend to diversify within 1–7 years.
4. No-income-tax state. The federal LTCG advantage is maximized when there's no state tax on top. If you're a California or New York resident, state tax on the NUA (at ordinary rates, no CG preference in most states) reduces the benefit — though the federal savings often remain positive.

When Rollover Wins

• Low NUA ratio (<30% of value is NUA). Paying ordinary income on 70%+ of the position today just to get LTCG treatment on the remaining 30% rarely pencils out.
• High-income distribution year. If you retire with a large severance, a bonus payout, or other IRA distributions in the same year, the cost basis hits the top brackets — magnifying the ordinary income hit.
• Plan to hold the stock forever and leave to heirs. At death, heirs receive a step-up in basis to FMV under IRC §1014. If you roll into an IRA and never sell, your heirs inherit an IRA that distributes over 10 years (T.D. 10001) — but if the NUA shares pass at death with a step-up, the built-in gain disappears. The borrow-against-the-position strategy (pledged asset line) can also generate liquidity without triggering the NUA gain.

Practical Mechanics

1. Get the cost basis records before you leave. After separation, recovering plan cost records becomes very difficult. Request a written statement of your employer stock average cost basis from the plan administrator or HR before your last day.
2. Request a lump-sum in-kind distribution from the plan. The non-stock assets can be rolled to a rollover IRA in the same calendar year — only the company stock moves to a taxable brokerage account, in shares.
3. The plan administrator issues a 1099-R. The cost basis will be coded as ordinary income (Box 1). The NUA amount should appear in Box 6. Confirm this with your administrator and tax preparer.
4. When you open your taxable brokerage account to receive the shares, confirm that your broker records the FMV at distribution as the cost basis for those shares — not $0. Selling the shares with an incorrect basis overstates your gain.
5. If you are a pre-1936 plan participant, also explore Form 4972 (10-year forward averaging) as an alternative election — a narrow provision that sometimes beats even NUA for very old plan participants.

Related Strategies

• Concentrated Stock Diversification — once NUA shares are in a taxable account, staged sell-downs, exchange funds, and DAF donations are your tools for diversifying without a single large tax bill
• Roth Conversion Strategy — for the traditional IRA assets you rolled over alongside the NUA stock; the same conversion math applies
• Tax-Efficient Asset Location — where to hold the proceeds after selling NUA shares
• Charitable Giving with Appreciated Stock — donating NUA shares directly to a DAF before selling eliminates the LTCG and NIIT entirely if you have charitable intent
• Pledged Asset Line — if you want to defer selling NUA shares indefinitely, borrowing against them generates liquidity without a tax event

1. IRC §402(e)(4)(D) — NUA of employer securities excluded from gross income at time of lump-sum distribution; characterized as long-term capital gain at the time of subsequent sale regardless of holding period after distribution. law.cornell.edu/uscode/text/26/402. NUA rules unchanged by SECURE 2.0 or OBBBA P.L. 119-21.
2. IRC §72(t)(2)(A)(v) — age 55 exception: distributions from qualified plans where separation from service occurs in or after the year the participant turns 55 are exempt from the 10% early withdrawal penalty. IRS Publication 575 (2025). irs.gov/publications/p575
3. IRC §1411 — Net Investment Income Tax, 3.8% on the lesser of (a) net investment income or (b) MAGI above $200,000 single / $250,000 MFJ. Not modified by OBBBA P.L. 119-21. IRS NIIT Q&A
4. 2026 LTCG brackets per IRS Rev. Proc. 2025-67 (OBBBA-adjusted): 0% ≤$49,450 (single) / ≤$98,900 (MFJ); 15% ≤$545,500 single / ≤$613,700 MFJ; 20% above. IRS Rev. Proc. 2025-67
5. 2026 ordinary income brackets per IRS Rev. Proc. 2025-32: 22% bracket ≤$105,700 (single) / ≤$211,400 (MFJ); 24% bracket ≤$201,800 (single) / ≤$403,600 (MFJ). IRS Rev. Proc. 2025-32

Tax values verified May 2026. IRC §402(e)(4) NUA rules unchanged by SECURE 2.0 or OBBBA P.L. 119-21.