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Retirement Planning

Net Unrealized Appreciation (NUA): Company Stock in Your 401(k)

NUA lets you take company stock out of a 401(k) in kind, pay ordinary tax only on its cost basis, and pay long-term capital gains rates on the growth.

Net Unrealized Appreciation (NUA): Company Stock in Your 401(k)

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What is net unrealized appreciation?

  • NUA is the growth in value of employer stock inside a qualified plan, measured from the plan's cost basis to its value when distributed.
  • If the shares come out in kind as part of a qualifying lump-sum distribution, only the cost basis is taxed as ordinary income that year.
  • The NUA itself is not taxed until you sell, and then it is taxed at long-term capital gains rates regardless of how long you hold.
  • Rolling the same shares to an IRA instead makes every future dollar withdrawn taxable as ordinary income.
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Full Guide

What is net unrealized appreciation?

  • NUA is the growth in value of employer stock inside a qualified plan, measured from the plan's cost basis to its value when distributed.
  • If the shares come out in kind as part of a qualifying lump-sum distribution, only the cost basis is taxed as ordinary income that year.
  • The NUA itself is not taxed until you sell, and then it is taxed at long-term capital gains rates regardless of how long you hold.
  • Rolling the same shares to an IRA instead makes every future dollar withdrawn taxable as ordinary income.

What qualifies as a lump-sum distribution?

  • Your entire balance in all of that employer's plans of the same kind must be paid out within a single tax year.
  • It must follow a triggering event: separation from service, reaching 59½, death, or, for the self-employed, total and permanent disability.
  • The employer stock must be distributed as shares, not sold inside the plan first; the rest of the account can usually be rolled to an IRA.
  • NUA generally requires a lump-sum distribution of the whole plan balance within one tax year after a triggering event, so ask the plan for your cost basis and history first.

How are the shares taxed after they come out?

  • Growth above the value on the distribution date is short- or long-term gain depending on how long you hold after distribution.
  • If you are under 59½ and not covered by the rule of 55 or another exception, the 10% additional tax can apply to the taxable cost basis.
  • The plan generally must withhold 20% on the taxable amount, but withholding cannot exceed the cash and non-employer property in the distribution.
  • NUA does not get a step-up in basis at death; heirs still owe long-term capital gains tax on the NUA portion when they sell.

When NUA tends to matter most

  • It is most relevant when the stock's cost basis is low relative to its current value, since only the basis is taxed as ordinary income.
  • A high basis shrinks the benefit and adds a large ordinary-income bill in the distribution year.
  • You can apply NUA to some lots or shares and roll the rest, which lets you choose low-basis shares for the in-kind distribution.
  • Paying tax on the basis in a lower-income year, such as the year after leaving work, can change the math; a CPA can model it.

What are the risks of keeping the stock?

  • NUA is a tax election, not an investment view; holding a large single-company position can lead to large, lasting losses.
  • Many tech employees already hold company RSUs or ESPP shares, so an NUA distribution can deepen existing concentration.
  • Some people sell the distributed shares soon after, keeping the capital-gains treatment on the NUA while reducing single-stock exposure.
  • Shares moved to a taxable account are generally more exposed to creditor claims than assets held inside an ERISA plan.

Key takeaways

  • NUA taxes the cost basis now as ordinary income and the built-in gain later at long-term capital gains rates.
  • It requires a lump-sum distribution of all same-type plans with that employer in one tax year after a triggering event.
  • Rolling to an IRA is irreversible for NUA purposes, so review the option before moving the account.
  • The rules are technical and records matter; confirm cost basis, eligibility, and state tax with the plan administrator and a CPA.
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