Evaluating NUA for Highly Appreciated Employer Stock In Your 401(k)
Episode 47
Evaluating NUA for Highly Appreciated Employer Stock In Your 401(k)
Published on Aug 12th, 2026
Episode Summary
Episode 47 of Retirement Tax Matters breaks down Net Unrealized Appreciation (NUA) for employer stock held inside a 401(k) plan. Garrett and Adam clarify that NUA only applies to company stock inside qualified retirement plans, excluding ESPPs, RSUs, and stock options. Transferring appreciated shares in-kind to a brokerage account allows retirees to pay ordinary income tax on the original cost basis while securing long-term capital gains tax rates on the growth. The strategy relies heavily on a low cost basis ratio, requiring a complete lump-sum distribution of the plan balance within one calendar year after a trigger event. The show covers key trade-offs, including single-stock concentration risk, upfront tax bills, losing tax deferral, and losing the step-up in basis at death for heirs. Finally, verifying in-kind transfer policies and cost basis tracking methods with HR helps retirees model an accurate tax projection before taking action.
Key Tax Planning Questions
Question 1: Is NUA better than a traditional IRA rollover for company stock?
When I see company stock sitting inside a 401(k), I usually get a little excited hoping that a Net Unrealized Appreciation tax planning strategy makes sense. But leveraging a NUA rollover strategy isn’t always a slam dunk over a traditional IRA rollover. It takes a specific set of circumstances for NUA to come out ahead.
The main issue usually comes down to your cost basis compared to the current market value. Cost basis is what was paid for those shares over your career. If you changed employers halfway through your working years or your employer stock has had modest growth, your basis could represent a significant portion of your overall position. In that scenario, NUA loses its appeal because you pay ordinary income tax upfront on a big dollar amount just to get capital gains rates on a smaller amount of growth.
On the other hand, if you spent many decades at a successful company or experienced explosive growth in a short time, your employers stock basis could be very low while the market value is high. That is where NUA shines. Transferring those shares in-kind to a brokerage account allows you to pay ordinary income tax only on the original cost basis in the distribution year. The growth is then allowed to be taxed at long-term capital gains rates when you eventually sell, ranging from 15% to 20%, plus the 3.8% Net Investment Income Tax if your income crosses higher thresholds.
Make sure you note the IRS requires a full lump-sum distribution of the entire 401(k) account in a single calendar year following a qualifying event, like leaving your job or reaching age 59.5. The company stock moves to a brokerage account, and the remaining 401k assets can be rolled over to a Traditional IRA.
As a financial planner working with $2M-$8M net worth retirees, I tend to come across more situations where the NUA loses out to a traditional IRA rollover. But when I do come across situations where NUA applies, it’s usually a situation where a huge amount of tax savings could be lost if you don’t know what you’re looking for. If you’re looking for another set of eyes, working together with your financial planner and tax preparer can help you decide which is a better strategy for your retirement plan.
Question 2: What are the biggest gotchas with an NUA distribution?
While a Net Unrealized Appreciation distribution can offer significant tax savings for the right person, there are several trade-offs that can catch retirees off guard if they do not plan ahead.
First, you lose the step-up in basis at death on the NUA portion of the stock. Under IRS guidelines, the unrealized appreciation is classified as Income in Respect of a Decedent. That means if you hold the stock until you pass away, your heirs will still owe long-term capital gains tax when they eventually sell those shares.
Second, an NUA distribution creates an immediate upfront ordinary income tax bill on the stock original cost basis in the year of transfer. If your cost basis is $100,000 or $500,000, that full amount gets stacked on top of your existing taxable income for that calendar year. Coming up with the cash outside the account to cover that tax liability can present a liquidity challenge for some.
Third, you give up ongoing tax-deferred growth once the shares move out of the 401k and into a taxable brokerage account. Any future dividends, interest, or post-distribution growth will be taxable as they occur.
Fourth, executing NUA does not automatically solve single-stock concentration risk. You may have executed a smart tax move, but holding a massive position in your former employer keeps your retirement plan exposed to the business performance of a single company.
Finally, there are several operational details you must verify with your plan administrator. Your 401k plan document must specifically permit in-kind stock transfers that a NUA strategy requires, and the entire balance of all qualified plans at that employer must be fully distributed within a single calendar year after a trigger event, such as leaving your job or turning 59.5. Taking a partial distribution or missing the December 31st deadline eliminates your NUA eligibility until the next qualifying trigger event.
If you separate from service before age 55, the 10% early withdrawal penalty applies to the cost basis only, which may be manageable if the basis is low but expensive if the basis is high. You should also confirm whether your plan administrator tracks specific stock purchase lots or uses an average cost basis calculation, as average costing can dilute the tax advantage of your lowest-basis shares.
Question 3: I have about $1 million of highly appreciated company stock inside my 401(k) with a $100,000 cost basis. I am charitably inclined and considering an NUA strategy, but I am wondering if I can combine it with a Donor Advised Fund to help lower my taxes. Can these two strategies work together?
One of the best parts of tax return driven financial planning is seeing two tax strategies work together. If you are charitably inclined and holding a large position of highly appreciated company stock in your 401(k), combining Net Unrealized Appreciation with a Donor-Advised Fund can be neat synergistic tax planning moves.
When you execute an NUA distribution, you move the company stock in-kind out of your 401(k) into a taxable brokerage account. In that distribution year, you owe ordinary income tax on the original cost basis, while the growth qualifies for long-term capital gains rates when sold.
If you plan to give to charity or your church anyway, you can donate a portion of those appreciated stock shares directly from your brokerage account into a Donor-Advised Fund. This move creates a two-fold tax benefit. First, transferring the appreciated stock to the DAF eliminates the long-term capital gains tax on those shares. Second, the donation generates a charitable itemized deduction equal to the full market value of the stock on the transfer date. You can then use that charitable deduction to help offset the ordinary income tax triggered by the cost basis of your NUA distribution.
Another practical benefit of a DAF is timing control. You receive the full tax deduction in the year you contribute the stock, but you do not have to distribute all that money to charity immediately. You can grant those dollars to your favorite qualified charitable organizations over several years. You can also take the cash sitting in your checking account that you normally would have used for charitable checks and reinvest it into your brokerage account to add more portfolio diversification while resetting cost basis.
One important rule to keep in mind. When you donate long-term appreciated stock to a DAF, your current-year deduction is capped at 30% of your Adjusted Gross Income. Any unused deduction above that 30% limit carries qualifies to be carry-forward for up to five future tax years, but this may influence you on the amount you contribute. Before executing this move, running an intra-year tax projection with your financial planner and tax preparer helps ensure the deduction lines up cleanly with your current-year income.
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional. And this morning we have got a great topic. Some of our topics are very broad and apply to a lot of people. In this show, we are looking at employee stock that is sitting inside a retirement plan. For a lot of people who listen, maybe that is something that has happened. Normally, you are in a company for a long time, you have saved really well, and maybe they offered company stock inside the plan. There are just some different things that you have to consider when that is on the table. Today is a crash course to help open people's eyes to nuance or different rules involved. The caveat we always give at the beginning is that this will not be the definitive "this is what you need to do, go do it right now," but more so some key items to consider. If this sounds like it resonates with you or would be important to your family, then go meet with a financial planner, do a deep dive on your own, or give us a call. We would be happy to talk through these things with you. So without further ado, let's toss it over to you. Tell us more about employee stock inside of a retirement plan, specifically net unrealized appreciation.
Garrett: Yeah. This is one of those strategies where when it applies to you, you know it applies to you. If you have never heard of this term, there is a chance it might apply, but maybe not. Net unrealized appreciation, or NUA, comes up often with retirees in that $2 million to $8 million range. Some people are diligent savers who put money in over time to accumulate $2 million to $8 million. But when I meet someone on the younger end of that threshold, maybe in their 40s or early 50s with $6 million or $7 million, there is usually something out of the ordinary that acted as rocket fuel. One of those unique drivers can be working for an employer whose stock has grown tremendously.
Garrett: I was recently in Idaho visiting family and was reading about Micron up in Boise. They have seen explosive growth in 2026 with all the AI advancements happening. If you were an employee at a company like that where you were able to get employer stock inside a retirement plan, your 401(k) balance can grow significantly. Then you end up in a situation where people email me saying, "I work for an employer, I have $8 million in employer stock, and my net worth is $10 million. I need some help."
Garrett: Our goal today is to help you identify if this strategy fits your situation and if you need to do a deeper dive. At the outset, let's start with the basics of how the NUA process works. First, net unrealized appreciation is specifically for employer stock held inside a qualified 401(k) plan. There are many equity plans out there. You might have an employee stock purchase plan (ESPP) where you buy stock at a discount. That is not eligible for NUA. You might receive restricted stock units (RSUs). Those are generally not eligible. You might get stock options like NSOs or ISOs, and those are also not eligible. Today we are highlighting that NUA is strictly an opportunity for employer stock purchased inside your qualified pre-tax traditional 401(k) account. If you participate in your 401(k) and put a sizable amount into employer stock deferrals, pay close attention.
Garrett: Second, whether you pursue NUA depends heavily on your cost basis versus your appreciated growth. If you put a small amount in and it exploded in growth, that is a sign to evaluate NUA. If you work for a steady company that grew methodically over the years and the growth is modest, NUA might not offer a net benefit. The primary benefit of an NUA distribution is that instead of paying ordinary income tax on the entire withdrawal during retirement, when you might be in the 24%, 32%, 35%, or 37% bracket, you can separate the growth.
Garrett: Let's put some numbers on this. Say someone has $1,000,000 in employer stock inside their 401(k). Over a working career, they contributed $100,000 in employee deferrals to buy that stock, and it grew to $1,000,000, representing $900,000 of growth. That is a candidate for NUA because you have a small basis and substantial growth. Through an eligible lump-sum distribution after a qualifying event, you move that full $1,000,000 of employer stock in-kind to a taxable brokerage account, while rolling any remaining non-stock 401(k) assets into a Traditional IRA. In the year of distribution, you pay ordinary income tax only on the $100,000 cost basis. The $900,000 of growth is eligible for long-term capital gains rates (15% or 20%, plus the Net Investment Income Tax if applicable). Instead of paying 24% or 32% ordinary tax on the full amount, the growth is taxed at lower capital gains rates.
Garrett: The main rules to remember are that the entire plan balance must be fully distributed within a single calendar year, and the distribution must occur after a qualifying event: separation from service, reaching age 59.5, disability, or death. You cannot do a partial distribution from the plan and leave assets behind past year-end. It must be a complete lump-sum distribution after a trigger event.
Adam: Great. Today I am going to ask you for a general framework. Give us a prototypical person who should be on the lookout for NUA, and double-click on long-term capital gains treatment to ensure people do not end up accidentally triggering a large ordinary income tax bill.
Garrett: A prototypical example is someone working at a tech or semiconductor company, or an early employee at a growing business, where a $100,000 cost basis grew 10X to $1,000,000. If that is in your 401(k) and you are approaching age 59.5, retirement, or disability, you should look closely at NUA. The trickier scenarios are steady companies where someone contributed faithfully over 20 or 30 years, and the account is 50% basis and 50% growth. In a $1,000,000 stock position with $500,000 of cost basis, taking an NUA distribution adds $500,000 of ordinary income in a single year. Pushing yourself into higher ordinary brackets just to get capital gains rates on the remaining $500,000 of growth often does not make sense. That is why running a tax projection is essential.
Garrett: When basis is 25% or lower relative to total value, NUA becomes very compelling. However, you have to weigh the trade-offs. First, NUA stock does not receive a step-up in basis at death under tax rules; heirs will still owe capital gains tax on that growth. Second, you face an immediate upfront ordinary income tax bill on the cost basis in the year of distribution. Third, once distributed to a brokerage account, you lose tax deferral on future dividends and gains. Fourth, holding concentrated company stock creates ongoing portfolio risk. If you hold $8 million in employer stock and execute an NUA, you still hold $8 million of single-stock risk. Having a diversification exit plan is critical so you do not hold a concentrated position all the way down in a downturn.
Adam: What should the next steps be if someone recognizes this scenario in their own 401(k)?
Garrett: The best approach is to start with a forward-looking income tax projection. Understand where your income will land at the end of this year and next year, and model out future years. If you hold low-basis employer stock inside a 401(k), tax-return-driven financial planning is the best way to evaluate an NUA decision before executing anything.
Adam: That aligns with our year-end tax planning checklist. Pulling up your tax return and running projections helps you build a roadmap for where you are going. What else should people verify?
Garrett: First, verify that your 401(k) plan document actually permits an in-kind distribution of employer stock to a brokerage account. Some plans require full liquidation to cash, which destroys NUA eligibility. Second, check how your plan administrator tracks cost basis. If you worked somewhere for 30 years and the plan uses an average cost basis calculation rather than tracking specific low-basis share lots, that accounting method can impact your tax math. Verifying those operational details with HR upfront is essential.
Adam: Thank you all for following along. We are over 1,000 subscribers on YouTube now, which is a great milestone. Check out the year-end tax planning checklist linked below, visit retirementtaxmatters.com to subscribe to Garrett's weekly newsletter, and we will see you next week. I'm Adam Reed, this is Garrett Crawford, CFP® professional, and we are Retirement Tax Matters.