Net Unrealized Appreciation (NUA): Pay Capital Gains Rates on Your 401(k) Company Stock

If you hold your employer's stock inside a 401(k) and roll the entire account to an IRA, every dollar you eventually withdraw will be taxed as ordinary income — at rates up to 37%.

There is a little-known IRS rule that can change that.

The Net Unrealized Appreciation (NUA) strategy lets you take your company stock out of the plan in-kind and pay long-term capital gains rates on the appreciation — permanently, regardless of how quickly you sell. For employees sitting on a large, highly appreciated stock position, the tax savings can be substantial.

What NUA Is

NUA is the difference between what your 401(k) plan paid for your employer stock (the cost basis) and the stock's fair market value at the time it is distributed to you.

Every dollar of that appreciation — the NUA — is locked in at the moment of distribution. From that point forward, when you sell the stock, the NUA is taxed at long-term capital gains rates, no matter how soon after distribution you sell.

This is the opposite of a standard IRA withdrawal, where every dollar — original contribution and every dollar of growth — is taxed as ordinary income.

How the Math Works

A distribution of employer stock has three distinct pieces, each taxed differently:

1. Cost basis — What the plan originally paid for the shares. Taxed as ordinary income in the year of distribution, just like any other 401(k) withdrawal. Subject to the 10% early withdrawal penalty if you are under 59½.
2. NUA — The appreciation that built up inside the plan. Deferred until you sell, then taxed at long-term capital gains rates — always, even if you sell the day after distribution.
3. Post-distribution appreciation — Any gains that accrue after the stock leaves the plan. Taxed as short-term or long-term capital gains depending on how long you hold the shares in the taxable account.

The core advantage: in 2026, long-term capital gains rates top out at 20% for most taxpayers, versus 37% for ordinary income. For a retiree in the 24% ordinary bracket with a 15% LTCG rate, that is a 9-percentage-point spread on the NUA amount.

2026 Long-Term Capital Gains Rates

Taxable Income (MFJ)	LTCG Rate	With NIIT (if MAGI > $250k MFJ)
$0 – $98,900	0%	0%
$98,901 – $613,700	15%	18.8%
Above $613,700	20%	23.8%

The 3.8% Net Investment Income Tax (NIIT) applies to NUA proceeds if your MAGI exceeds $200,000 (single) or $250,000 (MFJ) — raising the effective top rate to 23.8%. This is still well below the 37% ordinary income ceiling, but it narrows the gap for high-income households.

The Four Requirements

The NUA tax break is not automatic. All four conditions must be satisfied simultaneously:

1. Qualified plan. The stock must be in a pre-tax employer-sponsored plan — 401(k), profit-sharing, or pension. Roth 401(k) accounts do not qualify; those assets are already tax-free.
2. Triggering event. The distribution must be due to one of: reaching age 59½, separation from service (retirement, resignation, or termination), disability, or death.
3. Lump-sum distribution in a single calendar year. The entire balance of all qualified plans from that employer must be distributed in the same tax year. You cannot cherry-pick only the stock — everything goes. Non-stock assets can be rolled to a traditional IRA in the same move.
4. In-kind distribution to a taxable brokerage account. The shares must transfer as shares, not liquidated to cash first. The moment you convert stock to cash inside the plan, the NUA treatment is lost.

The Typical Execution

The mechanics follow a specific sequence:

• Identify the cost basis from plan records. Your plan administrator must provide this — it is the number that determines how much you pay as ordinary income at distribution.
• Open a taxable brokerage account before the distribution.
• Instruct the plan to distribute the employer stock shares in-kind to the brokerage account and roll all other assets (bonds, mutual funds, other stocks) to a traditional IRA.
• In the distribution year, report cost basis as ordinary income on Form 1099-R. The NUA is reported but not taxed until the stock is sold.
• Sell the stock at the timing and pace that fits your income plan. Each sale triggers long-term capital gains on the NUA portion.

When NUA Is Most Powerful

The strategy delivers the largest advantage when the cost basis is low relative to current market value. An employee who received company stock as a match at $15/share while it is now trading at $120/share has an enormous NUA relative to basis — the ordinary income hit at distribution is small, and the capital gains savings on the NUA are large.

The math tilts against NUA when:

• Basis is high — If you bought company stock near current prices, there is little NUA to preserve. The ordinary income hit at distribution is nearly equal to what you would have paid spreading withdrawals over time from an IRA.
• Future ordinary income will be low — If your projected retirement bracket is 10% or 12%, the spread between ordinary and capital gains rates collapses. Full rollover is simpler and may cost roughly the same.
• State taxes are high — Most states tax capital gains at ordinary income rates. The federal advantage can evaporate at the combined state-plus-federal rate in California, New York, or similar high-tax states.

The IRMAA Trap in the Distribution Year

The year you execute an NUA distribution is unusual. The cost basis flows through AGI as ordinary income, which can spike your MAGI well above your normal range.

IRMAA (Medicare Part B and D surcharges) uses a two-year lookback — so a large NUA distribution in 2026 will set your 2028 IRMAA tier. This is a known cost of the strategy, not a reason to avoid it, but it must be priced into the analysis. A retiree crossing into the first IRMAA tier could pay an extra $1,000+ per year in Medicare premiums for two years as a result.

Concentration Risk After Distribution

The NUA strategy results in a single-stock position in a taxable account. Selling to diversify triggers capital gains, but continuing to hold concentrates retirement wealth in one company. A realistic diversification plan — and the capital gains cost of executing it — should be part of the decision before distribution, not after.

Important Notes

• NUA rules are governed by IRC Section 402(e)(4). The IRS Notice 98-24 provides detailed guidance.
• The distribution is irreversible. Verify cost basis records with your plan administrator before executing.
• Custodian mechanics vary. Confirm that your plan supports in-kind distribution of shares to an outside brokerage account.
• State tax treatment of NUA varies significantly. California, for example, taxes capital gains as ordinary income, effectively eliminating the federal advantage at the state level.
• This is education, not individualized tax or legal advice.