Deorbit Plan

NUA calculator: company stock, NUA election or IRA rollover

The federal tax on taking employer shares out under the NUA rules versus rolling them to an IRA

By the Deorbit Plan editorial team, a Berrydyne program · Last reviewed · Topic: Taxes in retirement

What it computes

When appreciated employer stock leaves a 401(k) in a lump-sum distribution, you can move the shares to a taxable account instead of rolling them to an IRA. Then only the plan’s cost basis is taxed as ordinary income that year[3]; the net unrealized appreciation (NUA) is taxed when you sell, always as long-term capital gain[2], and it is not subject to the net investment income tax[9]. Roll the shares to an IRA and every dollar comes out later as ordinary income. This calculator runs both paths through the simulator’s tax function, year by year, and finds the basis-to-value ratio at which they cost the same.

NUA versus rollover: federal tax compared

Taking the shares under the NUA rules costs $6,000 in federal tax over 8 years of selling, against $56,021 for rolling everything to an IRA: $50,021 less. The two break even when the basis is 70% of the shares’ value (yours is 13%).

Federal tax added each year (income tax, net investment income tax and any early-withdrawal penalty). Year 0 is the distribution year.

YearAgeNUA: taxed amountNUA: taxIRA withdrawalRollover: tax
062$50,000 ordinary$6,000none$0
163$45,750 gain$0$52,000$6,240
264$47,830 gain$0$54,080$6,490
365$49,993 gain$0$56,243$6,503
466$52,243 gain$0$58,493$6,773
567$54,583 gain$0$60,833$7,054
668$57,016 gain$0$63,266$7,346
769$59,547 gain$0$65,797$7,650
870$62,178 gain$0$68,428$7,965
Total$6,000$56,021

Same shares, same growth and the same sale years in both paths, so the money received is the same and only the tax differs. Nominal dollars at this year’s tax tables; no state tax; a joint return assumes a spouse of the same age.

Worked example

A married 62-year-old holds company shares worth $400,000 with a plan cost basis of $50,000, has $60,000 of other income and plans to sell over 8 years while the shares grow 4% a year. Under the NUA rules the $50,000 basis is ordinary income now ($6,000 of tax), and the $350,000 of NUA plus later growth is taxed at capital-gains rates as the shares are sold: $6,000 in all. Rolling to an IRA and withdrawing the same amounts costs $56,021.

The difference, $50,021, depends mostly on how much of the value is basis. Here the paths break even when the basis is about 70% of the shares’ value; below that, NUA wins. A higher ordinary rate in retirement, or gains that fit in the 0% band, widen the gap.

What it ignores

  • Whether you qualify: a lump-sum distribution of the whole balance after a triggering event, with the shares moved in kind. See the NUA guide.
  • Time value: taxes paid now and later are added as they are, without discounting, and the tax on the basis is assumed paid from other money.
  • State tax, required minimum distributions on the IRA, and the step-up in basis that heirs get on later growth but not on the NUA.
  • Penalty exceptions for IRA withdrawals and the holding period of shares sold within a year of the distribution (all later growth is treated as long-term here).
  • Concentration risk of holding one company’s stock, which is often the bigger issue.

The rule behind it

The full explanation, with sources, is in Net unrealized appreciation (NUA) tax treatment.

See it over a full plan

The simulator does not model the NUA election itself, but it shows how the rest of a plan (withdrawals, conversions, RMDs and Social Security) sets the tax rates this comparison depends on. Open it in the simulator →

If you already have a saved plan, the link only takes you to the right panel; your plan is not changed.

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This tool shows how the rules work. It is not financial, tax or investment advice. See the disclaimer.

Sources