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

If you held employer stock inside a 401(k) for years — and it's appreciated significantly — you may be able to convert a large chunk of that gain from ordinary income (up to 37%) into long-term capital gains (0–20%). The mechanism is called the NUA strategy. It's one of the most overlooked tax levers in retirement planning, and it eliminates a future RMD driver at the same time.

What is Net Unrealized Appreciation?

When you retire and take a lump-sum distribution of your 401(k), the IRS normally taxes everything as ordinary income — whether you roll it or take cash. The NUA rules are an exception built into IRC §402(e)(4) that lets you pull employer stock out in-kind and pay a very different tax treatment on the gain portion.

Here's how the taxes split:

• Your plan's cost basis in the shares (what the plan paid for the stock through payroll deductions and employer contributions over the years): taxed as ordinary income in the year of distribution
• The NUA — the appreciation above that cost basis as of the date of distribution: taxed as long-term capital gains when you eventually sell the shares, regardless of how long the plan (or you) actually held the stock
• Any further appreciation after you receive the shares: taxed as short-term or long-term gain depending on your holding period after distribution

A concrete example

Say you worked at a company for 25 years and accumulated 2,000 shares of employer stock inside your 401(k). Over those years, the plan purchased those shares at an average of $30/share — your cost basis is $60,000. Today the stock trades at $180/share — your current value is $360,000. The NUA is $300,000.

Your 401(k) also holds $440,000 in diversified mutual funds (not employer stock).

Option A — Standard rollover (everything to IRA):

• Roll $800,000 to IRA. No immediate tax.
• Future distributions taxed as ordinary income at your marginal rate.
• At a blended 24% rate over time: ~$192,000 in tax on $800,000.
• The $800,000 also drives future RMDs for decades.

Option B — NUA strategy:

• Take a lump-sum distribution. The 2,000 employer shares come out in-kind.
• Roll the $440,000 in mutual funds to a rollover IRA. No immediate tax on that portion.
• Pay ordinary income tax on $60,000 cost basis this year. At 22%: ~$13,200.
• The $300,000 NUA is taxed at long-term capital gains rates when you sell — at 15%: $45,000.
• Total tax on employer stock: $58,200 vs. rolling and paying $86,400 (24% × $360,000).
• Tax saved on just the employer stock: ~$28,200 — and that's before accounting for the lower future RMDs.

The further the stock has appreciated relative to its cost basis, the bigger the savings. A stock at 5× basis saves far more than one at 1.5× basis.

2026 long-term capital gains rates

The NUA portion is taxed at these rates when you sell:¹

Values per IRS Rev. Proc. 2025-32 (2026 tax year).

Many retirees — particularly in the early retirement years before large RMDs kick in — land in the 15% LTCG bracket. The spread between 22–32% ordinary income and 15% capital gains is the engine that makes NUA work. And if your income is low enough, some of the NUA may qualify for the 0% rate.

The NIIT overlay

If your Modified Adjusted Gross Income exceeds $200,000 (single) or $250,000 (married), the NUA gain is also subject to the 3.8% Net Investment Income Tax when you sell.² These thresholds are not adjusted for inflation — the same numbers since 2013. Add NIIT to the LTCG rate: 15% + 3.8% = 18.8% for most retirees above the threshold, or 20% + 3.8% = 23.8% at the top. Still favorable versus ordinary income rates of 24–32%.

The two hard requirements

1. A qualifying triggering event

The NUA rules only apply after one of these events:³

• Separation from service (retirement, termination, or resignation from the employer sponsoring the plan)
• Age 59½ (even if still employed — though still-employed distributions may be restricted by plan rules)
• Disability
• Death (distributions to a beneficiary)

Most retirees trigger the rule on separation from service. If you retired three years ago and the stock is still inside the plan, you can still elect NUA treatment — the triggering event already happened.

2. A lump-sum distribution in one tax year

This is the rule that catches people off guard. To qualify for NUA treatment, you must distribute your entire account balance from all plans sponsored by that employer within a single tax year.³ Not just the employer stock — everything. Partial distributions don't qualify.

If you have a 401(k), a profit-sharing plan, and an ESOP all from the same employer, all three must be distributed in the same calendar year for any of them to receive NUA treatment. The portion that isn't employer stock rolls to a traditional IRA.

How to find your cost basis

The plan's cost basis in your employer shares — not your personal market basis — is what drives NUA treatment. This number comes from your plan's records, not your brokerage statement. Your plan administrator is required to provide it to you. Look for "employer stock cost basis" or "aggregate cost" on plan statements, or request it specifically from HR or your plan administrator before you elect a distribution.

The lower the cost basis relative to current value, the more attractive NUA becomes. A useful shorthand: if your NUA-to-basis ratio is greater than 3:1 (stock appreciated to more than 4× its plan cost), NUA usually wins over rollover.

NUA's effect on future RMDs

When you pull employer stock out under the NUA rules, that balance is gone from your tax-deferred accounts — permanently. If you had $800,000 in a 401(k) and take $360,000 in employer stock via NUA (rolling the other $440,000 to an IRA), your future RMD base is $440,000, not $800,000. At age 75, using the 24.6 divisor, that's an annual RMD of ~$17,900 instead of ~$32,500. That difference in income compounds into lower Social Security taxation, lower IRMAA exposure, and potentially a lower estate tax burden over time.

For retirees with very large 401(k) balances, NUA is one of several tools — alongside pre-RMD Roth conversions and QCDs — to reduce the lifetime RMD tax burden before it peaks at 80+.

What happens to the rest of the 401(k)

Only the employer stock gets NUA treatment. Everything else in the lump-sum distribution — mutual funds, money market, other investments — either goes to a rollover IRA (no immediate tax) or is taken as cash (taxed as ordinary income, with possible 10% penalty if under 59½). The optimal move for most retirees: roll the non-employer-stock assets to a traditional IRA and take only the employer shares in-kind.

The 10% early withdrawal penalty

The cost basis portion of the NUA distribution is subject to the 10% early withdrawal penalty if you are under age 59½ — unless you qualify for an exception. The separation-from-service exception at age 55 (or 50 for certain public safety employees) applies to 401(k) plans specifically and can shield the distribution from the penalty. If you've already reached 59½, the penalty doesn't apply regardless.

When NUA typically doesn't make sense

• Low appreciation: if the stock is barely above your cost basis, you're paying ordinary income tax now for minimal capital-gains savings later. Run the math with your actual numbers.
• High expected capital gains rate: if most of your retirement income will be above the 20% LTCG threshold, the spread vs. ordinary income narrows.
• Immediate cash need: NUA defers the capital-gains tax until you sell. If you need the full value immediately, you lose the tax-deferral benefit.
• Concentrated stock risk: NUA keeps you in a single stock. Many retirees diversify immediately, which is fine — but do it in tranches to manage the NIIT exposure.
• Plan doesn't hold employer stock: This is specific to plans that hold actual shares of your employer. Most target-date or index-fund 401(k)s don't qualify.

Inherited NUA

If you die holding appreciated employer stock received via an NUA distribution, your heirs do not get a step-up in basis on the NUA portion. The NUA travels to the heir; when they sell, they pay LTCG on it. However, any additional appreciation after you received the shares does get a step-up at death. This is different from how inherited taxable-account stock works, where the entire gain gets stepped up — something worth discussing with an estate attorney when you have a large NUA position.

The decision in practice

The NUA analysis requires your actual plan cost basis, your expected tax rates in the distribution year and subsequent years, your RMD trajectory, Social Security timing, and whether your estate plan favors IRAs or taxable accounts for different heirs. No generic calculator fully captures this — it's a planning decision, not a simple arithmetic exercise. The payoff, however, can be substantial: $25,000–$100,000+ in lifetime tax savings is common for retirees with significant employer stock positions.

If you worked at a company with a 401(k) match in company stock, or if your ESOP or profit-sharing plan holds shares with a low cost basis, this is worth a conversation before you make any rollover election. Once you roll over, the NUA election is gone — you can't undo it.

Sources

1. IRS Rev. Proc. 2025-32 — 2026 capital gains rate thresholds: single filer 0% ≤ $49,450; 15% $49,451–$545,500; 20% above $545,500. MFJ: 0% ≤ $98,900; 15% $98,901–$613,700; 20% above $613,700.
2. IRC §1411 / IRS Topic No. 559 — Net Investment Income Tax, 3.8% on lesser of NII or MAGI above $200,000 (single) / $250,000 (MFJ). Thresholds not indexed for inflation. irs.gov/taxtopics/tc559
3. IRC §402(e)(4) — Lump-sum distribution definition; triggering events; NUA tax treatment. IRS Publication 575 (Pension and Annuity Income). irs.gov/publications/p575
4. IRS Notice 98-24 — IRS guidance on NUA rules, cost basis treatment, and lump-sum distribution requirements. irs.gov/pub/irs-drop/not98-24.pdf

Tax values verified as of May 2026 against IRS Rev. Proc. 2025-32.