Net Unrealized Appreciation: Cut Tax on 401(k) Company Stock

Net unrealized appreciation is a tax rule that lets some people pay long-term capital gains rates, instead of ordinary income rates, on the growth of their employer’s stock held in a 401(k). If you’ve built up a big pile of company shares in your plan, learning how this works before you roll anything over could save you real money.

It’s also one of those rules where the details decide everything. The shares have to move a certain way, in a certain year, after a certain event. Miss one step and the benefit disappears. This post walks through the three requirements, how each piece of the stock is taxed, a worked example with the math, the situations where it doesn’t pay off and a checklist you can take to your plan administrator.

The Idea in Plain English

Fidelity defines net unrealized appreciation, usually shortened to NUA, as the difference between the cost basis of company stock and its market value at the time it’s distributed in kind from a plan as part of a lump-sum distribution.

Here’s what that means. Say your 401(k) bought company shares for $60,000, and they’re now worth $300,000. The $60,000 is the cost basis. The $240,000 of growth is the NUA.

Normally, everything that comes out of a traditional 401(k) is taxed as ordinary income. With the NUA rule, the growth part is taxed differently: it’s taxed as a long-term capital gain when you eventually sell. Long-term capital gains rates are 0%, 15% or 20%, depending on taxable income and filing status, according to IRS Topic 409. Per IRS Publication 575, the NUA is generally not taxed until you sell the shares, and gain up to the NUA is long-term capital gain.

The Three Requirements

Kitces lays out three conditions that must all be met. Fidelity’s description lines up with them.

1. The shares must come out in kind

The actual shares have to move from the plan into a regular taxable brokerage account. Selling the shares inside the plan and taking cash doesn’t qualify. Fidelity adds that rolling the stock into an IRA and then selling it disqualifies the NUA treatment.

2. It has to be a lump-sum distribution in one tax year

Per IRS Topic 412 and Publication 575, a lump-sum distribution is the participant’s entire balance from all of the employer’s qualified plans of that type, paid within a single tax year. In its examples, Kitces rolls the non-stock assets into an IRA in the same year.

3. It has to follow a triggering event

Per IRS Topic 412, a lump-sum distribution has to be paid because of the participant’s death, reaching age 59½, separation from service (for an employee) or total and permanent disability (for a self-employed person). Fidelity notes that distributions taken solely because of reaching 59½ are not lump-sum distributions in certain circumstances.

Kitces gives a cautionary example. A woman who retired at 56 took a $10,000 non-lump-sum distribution in the year she retired, and that used up her NUA window for that year. She would have to wait until she reached 59½ and then take a full lump-sum distribution in that year. The lesson: don’t take partial distributions after you leave a job until you’ve decided about NUA.

How Each Piece Is Taxed

There are three pieces of the stock, and each gets its own treatment. This table sums it up:

Piece	Taxed as
Cost basis	Ordinary income, in the year of distribution
NUA (growth in plan)	Long-term capital gain, when sold
Growth after distribution	Short- or long-term, by holding time

A few notes from the sources:

Cost basis. Fidelity says the pretax cost basis is usually taxed as ordinary income in the year the stock is distributed in kind, and it may also be subject to a 10% penalty if you’re under 59½. Kitces adds that the age 55 rule (separating from service in or after the year you turn 55) can remove the penalty on plan distributions. That rule isn’t an NUA requirement, but it matters to your bill.
NUA. Fidelity says it should be taxed as a long-term capital gain regardless of how soon after distribution the stock is sold, and should not be subject to the 10% early withdrawal penalty at any age. Kitces says it isn’t subject to the 3.8% Medicare surtax.
Growth after distribution. Appreciation after you take the shares out is short- or long-term depending on how long you hold them from the distribution date.

The two sources differ slightly on what happens at death. Fidelity lists possible favorable tax treatment for beneficiaries as a potential benefit, while Kitces says NUA is not eligible for a step-up at death.

A Worked Example: Dev’s Company Stock

Here is an invented example. Dev is 58, has just left a job and has $300,000 of company stock in the 401(k) plan. The plan bought it for $60,000. Dev assumes a 22% ordinary income tax rate and a 15% long-term capital gains rate. Those are assumptions for illustration only.

Value: $300,000
Cost basis: $60,000
NUA: $300,000 − $60,000 = $240,000

Option A: NUA. Dev moves the shares in kind to a brokerage account.

Tax now on the basis: $60,000 × 22% = $13,200
Tax later when the shares are sold at $300,000: $240,000 × 15% = $36,000
Total: $49,200

Because Dev is 58 and left the job in or after the year of turning 55, the 10% penalty on the basis wouldn’t apply, per Kitces’ description of the age 55 rule.

Option B: roll to an IRA and take it all out as ordinary income.

$300,000 × 22% = $66,000

On these simplified numbers, NUA saves about $16,800. But the comparison is flat, which hides a problem: a large withdrawal can push income into higher brackets. Kitces specifically notes that a large basis can push ordinary income into higher brackets, and that a very large NUA gain can reach the 20% capital gains bracket.

What If the Basis Is Higher?

Change one number. Suppose the basis were $150,000, which is 50% of the value.

Tax now: $150,000 × 22% = $33,000
Tax later: $150,000 × 15% = $22,500
Total: $55,500, versus $66,000 for the IRA approach

The savings fall from $16,800 to $10,500. The lower the basis relative to the value, the more NUA tends to help, which is the same pattern Kitces describes when it says a high basis relative to value can make the upfront tax outweigh the capital gains savings.

When NUA May Not Fit

Kitces lists several situations where NUA isn’t clearly better:

High basis relative to value. Its modeling found the break-even against an IRA rollover ranged from roughly 9 to 12 years at 50 cents of basis per dollar, 13 to 19 years at 25 cents, and 17 to 27 years at 1 cent, under its assumptions. In one example with a 60-year-old, NUA started about $11,000 ahead but the rollover overtook it after about six years.
A fast sale. Selling immediately gives up the longer tax deferral on the money that stays in an IRA.
Bracket creep. The basis is ordinary income in the year of distribution, so a large basis can push you into a higher bracket.
Large gains. A very large NUA can reach the 20% capital gains bracket.
State taxes. They can apply to both ordinary income and capital gains.
Timing errors. A non-lump-sum distribution after a triggering event, or missing the single-year window, can forfeit the strategy.
Concentration risk. Holding the stock to defer tax exposes you to one company. Kitces says holding decisions should rest mainly on risk and expected return. My post on how to reduce a concentrated stock position covers ways to spread that risk.
Basis reset. If you sell company stock inside the plan and buy it back, your basis resets and the NUA disappears. Kitces describes a case where the basis went from $120,000 to $600,000 this way.
Policy uncertainty. Kitces notes past budget proposals sought to close the strategy, so its future isn’t guaranteed.

Fidelity adds that future depreciation can offset the tax benefits, and that factors to weigh include your tax bracket, age at separation from service and overall retirement assets.

A Step-by-Step Checklist Before You Decide

Confirm you hold company stock in the plan. Check your statement for the share count, current value and cost basis.
Find the cost basis. Ask the plan administrator for the average cost per share, since this sets your ordinary income.
Calculate your NUA and your basis-to-value ratio. In Dev’s case, the basis was 20% of value.
Check your triggering event. Separation, disability or reaching 59½.
Hold off on partial distributions. Don’t take any non-lump-sum distribution after the trigger until you’ve decided.
Estimate the tax in the distribution year. Use your expected income plus the basis amount. If it pushes you into a higher bracket, recalculate.
Ask your plan whether it allows in-kind stock distributions.
Move the shares in kind. Plan the rollover of the other assets in the same year so the account ends at zero.
Decide your selling schedule. Write down how you’ll spread out sales so the position doesn’t stay concentrated. The 2026 long-term gains 0% bracket tops out at $49,450 for single filers and $98,900 for joint filers, per Rev. Proc. 2025-32 as analyzed by Current Federal Tax Developments, and Schwab suggests a multi-year sales plan with a tax budget.

Questions for Your Plan Administrator

Copy these into an email or call script:

Does the plan permit a lump-sum distribution with company stock sent in kind?
What is the total cost basis and the NUA on my shares?
Are there any restrictions on moving the stock, such as holding periods or blackout windows?
Is the stock held in an employer stock fund, and can it be converted into individual shares?
How long does an in-kind transfer take, and what paperwork is needed?
Will you report the cost basis and NUA on the Form 1099-R? Fidelity notes that Form 1099-B information may not reflect additional adjustments you are required to make on your return.
What happens if I need to correct something after the transfer?

Hand This Prompt to an AI Assistant

Paste this into an AI assistant and fill in your numbers. It’s built to keep the assistant from guessing.

Help me compare net unrealized appreciation (NUA) treatment with a rollover for company stock in my 401(k), using ONLY the numbers I give you.

Current value of the company stock in my plan: $[amount]
Cost basis of that stock (from my plan): $[amount]
My age and when I separated from service: [age, year]
Other taxable income I expect in the distribution year: $[amount]
Filing status: [single / married filing jointly / head of household]
Do I expect to sell the stock soon, or hold it for years? [soon / years]

Rules:
- Ask me for anything missing before you calculate.
- Show every calculation step by step: NUA, basis-to-value ratio, tax on the basis in the distribution year, and tax on the NUA when sold.
- Use tax rates I provide. If I don't provide them, ask me, and tell me to confirm brackets and capital gains thresholds with the IRS or a tax professional.
- Compare NUA with the alternative of rolling to an IRA and withdrawing later at ordinary rates, and say clearly that the comparison depends on my assumptions.
- List the three requirements (in kind, lump sum in one tax year, after a triggering event) and ask me whether I meet each.
- Mention that concentration in one company is a risk and that holding decisions should not be based on tax alone.
- Do not predict the stock price or tell me to buy or sell.
- End with questions to ask my plan administrator and my tax professional, including state taxes.

My Take: The Order of Operations Is the Whole Game

What strikes me about NUA is how much of it is process. The tax savings can be real, but the rule punishes people who do things in the wrong order, like rolling the stock to an IRA first or taking a small distribution right after leaving a job. That’s why the checklist above puts “hold off on partial distributions” ahead of nearly everything else.

I’d also say the concentration point deserves as much weight as the tax math. Kitces puts it plainly: whether to hold the stock should rest mainly on risk and expected return. A smaller tax bill doesn’t help if the stock falls a lot after you’ve paid tax on the basis. If you decide NUA fits, pairing it with a staged selling plan is a practical way to get both benefits.

Questions People Ask About NUA

Do I need to be retired to use NUA? Not exactly. Per IRS Topic 412, the distribution has to be paid because of death, reaching age 59½, separation from service (for an employee) or total and permanent disability (for a self-employed person). Leaving a job counts even if you’re not retired.

Can I use NUA on only some of my shares? Kitces gives an example of distributing just one lot in kind with a low basis, while rolling the rest to an IRA. The lump-sum rule still applies to the whole account, so the other assets must leave the plan in the same year.

What if I already rolled the stock to an IRA? Fidelity says rolling the stock into an IRA and then liquidating it disqualifies NUA treatment.

Is NUA taxed at the 0% rate sometimes? It’s taxed at long-term capital gains rates, which are 0%, 15% or 20% depending on taxable income and filing status, per the IRS. Whether your sale lands in the 0% bracket depends on your income that year.

Does the 10% penalty apply to NUA? Fidelity says NUA should not be subject to the 10% penalty at any age. The cost basis can be, if you’re under 59½ and no exception applies. Kitces notes the age 55 rule for people who separate in or after the year they turn 55.

A First Step This Week

Log in to your plan and look for the company stock line. Write down the share count, the value and the cost basis. If you’re thinking about leaving the job or you’ve already left, do nothing else with the account until you’ve checked the three requirements against your situation.

This post is general information, not financial, tax or legal advice, and it does not recommend buying or selling any security. NUA rules are technical and depend on your plan and your situation, so confirm details with the IRS, your plan administrator and a qualified tax professional.

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