NUA: the company-stock tax break hiding in your 401(k)

Last reviewed July 2026 · 5 min read

If your 401(k) or ESOP holds shares of your employer’s stock that have grown a lot, the default move at retirement — roll everything to an IRA — quietly converts that growth into future ordinary income. A little-known provision, net unrealized appreciation (NUA), offers a different deal: pay ordinary tax now on what the plan paid for the shares, and long-term capital gains rates on all the growth. For low-basis stock the difference can be large — and the rules are strict enough that one wrong move forfeits it permanently.

How the split works

NUA is the gap between what the shares are worth when they leave the plan and their cost basis inside the plan (what the plan paid for them). Under IRC §402(e)(4), when employer securities are distributed in kind — as actual shares moved to a taxable brokerage account, not sold and moved as cash — as part of a qualifying lump-sum distribution, only the cost basis is taxed as ordinary income in the year of distribution. The NUA itself is not taxed until you sell the shares, and it is then taxed at long-term capital gains rates regardless of how long you hold them after the distribution. Growth after the distribution is a normal capital gain with a normal holding-period clock.

The rate spread is the whole point. In 2026, ordinary rates run 10–37%, while long-term gains are taxed at 0%, 15%, or 20% — with the 0% rate covering taxable income up to $49,450 (single) or $98,900 (joint). Someone whose shares have a basis of $50,000 and a value of $400,000 would pay ordinary tax on $50,000 now and capital gains rates on $350,000 as they sell — versus ordinary rates on the full $400,000 (plus all future growth) coming out of an IRA.

The strict entry requirements

The IRS conditions (Publication 575 and Tax Topic 412) are unforgiving. The distribution must be a lump-sum distribution: the entire balance of all the employer’s like plans distributed within a single tax year. It must follow a triggering event — separation from service, reaching age 59½, death, or (for the self-employed) disability. The shares must move in kind to a taxable account. Everything else in the plan can be rolled to an IRA in the same year; only the NUA shares must land in taxable.

The traps

Roll the shares into an IRA — even accidentally, even partially — and NUA treatment is gone forever for those shares; they become ordinary IRA money. Take a partial withdrawal after a triggering event but before the lump-sum year, and you can disqualify the election until a new triggering event occurs. If you are under 59½ and no exception applies, the 10% early-distribution penalty applies to the taxable basis portion (though the age-55 separation-from-service exception often covers it). And the NUA portion never gets a step-up in basis at death — heirs still owe capital gains tax on it, unlike ordinary inherited brokerage shares.

When it tends to make sense — and when it doesn’t

NUA favors a low basis-to-value ratio (much of the position is appreciation), a meaningful spread between your ordinary rate and your capital gains rate, and a willingness to actually sell — because until you diversify, you are holding a concentrated position in the company that also paid your salary. It looks worse when the basis is high, when paying tax on the basis now would spike you into a higher bracket or across an IRMAA or ACA threshold, or when you expect decades of tax-deferred compounding to outrun the rate advantage.

Try it in Deorbit Plan

Deorbit Plan does not model the NUA election — the lump-sum timing, in-kind mechanics, and per-lot basis math are exactly the kind of one-shot, irrevocable decision worth taking to a CPA or advisor before you touch the account. What the simulator can show is the landscape on either side: duplicate your plan as Scenario B, then in the Accounts panel move the stock’s value out of Pre-tax (401k + trad IRA + ESOP) into the Taxable brokerage balance with its Cost basis set to the after-tax amount. The Compare view and the RMDs vs spending chart show the downstream difference — smaller forced RMDs and more capital-gains-rate money versus more tax-deferred compounding — so you walk into the professional conversation knowing which way your plan leans.

Educational content only — not financial, tax, or investment advice.

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