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

If you've accumulated employer stock inside a 401(k), a standard IRA rollover means every dollar of that stock will eventually be taxed as ordinary income — at 22%, 24%, or higher. There's an alternative. Under IRC § 402(e)(4), you can distribute the employer stock in-kind into a taxable brokerage account and pay ordinary income tax only on the cost basis. The rest — the net unrealized appreciation — is taxed at long-term capital gains rates (0%, 15%, or 20%) when you eventually sell.¹

For an early retiree with $400,000 of company stock and a cost basis of $80,000, the difference between ordinary income treatment and LTCG treatment on the $320,000 of appreciation can exceed $60,000 in lifetime taxes — and that's before counting the lower rate you'll likely pay in the low-income years before Social Security and RMDs start.

NUA tax savings calculator

Enter your employer stock details to see the tax impact of NUA versus a full IRA rollover. Estimates use 2026 federal tax values; state taxes and individual circumstances vary.

How NUA works: the mechanics

When you take a lump-sum distribution from a 401(k), you normally have two choices: roll it to an IRA (deferred, no tax now) or take cash (all taxable as ordinary income). NUA is a third path for employer stock specifically.

The distribution: You distribute the employer stock in-kind — not as cash — to a taxable brokerage account. The plan transfers the actual shares. On the day of distribution, you owe ordinary income tax on the cost basis (what the plan originally paid for the shares). The appreciation above that basis — the NUA — is not taxed until you sell the shares.

The sale: When you eventually sell the shares, the NUA is taxed at long-term capital gains rates (0%, 15%, or 20%) regardless of how long you held the stock inside or outside the plan. Under IRS Notice 98-24, the LTCG treatment on NUA is automatic — no holding period requirement applies to the NUA portion.² Any additional appreciation after the distribution date is a standard short-term or long-term gain depending on your actual holding period after the distribution.

What counts as "cost basis"

The cost basis for NUA purposes is the plan's original acquisition cost — what the employer stock was worth when it was added to your account (through employer matches, profit-sharing, or payroll deductions). This is tracked by the plan administrator and is typically far below the current stock price for a long-tenured employee. Your plan administrator's NUA statement will show both figures.

The four NUA triggering events

You must experience one of these qualifying events for the lump-sum distribution to be eligible for NUA treatment under IRC § 402(e)(4):¹

The lump-sum distribution requirement

This is the most common NUA mistake. The distribution must be a lump-sum distribution as defined in IRC § 402(e)(4)(D): you must distribute the entire account balance from all plans of the same employer within a single tax year. Partial distributions don't qualify.

NUA + Rule of 55: how they interact

For early retirees who separate at age 55 or later, the Rule of 55 under IRC § 72(t)(2)(A)(v) provides a 10% early withdrawal penalty exception for distributions from the plan they're separating from. NUA and Rule of 55 stack well together:

• The NUA itself is never subject to a 10% penalty. The NUA portion is taxed as LTCG at sale — penalty doesn't apply to capital gains. Only the cost basis (ordinary income portion) is subject to the 10% question.
• Rule of 55 covers the cost basis. If you're 55+ in the year of separation and take the lump-sum distribution, Rule of 55 eliminates the 10% penalty on the cost basis portion.
• Critical rule: Don't roll any part of the plan to an IRA before the NUA distribution. Once the plan assets are in an IRA, they lose eligibility for NUA treatment permanently.

See Rule of 55 guide and qualification checker.

Under 55 with company stock: your options

If you're under 55 and separating from service, the cost basis portion of an NUA distribution is subject to the 10% early withdrawal penalty unless another exception applies. Your options:

• Wait until 59½. Age 59½ is its own NUA triggering event. You can trigger the distribution at 59½ even if you've already left the employer years earlier — as long as the account hasn't been rolled to an IRA.
• 72(t) SEPP doesn't apply. SEPP elections cover the full plan balance with a fixed schedule; they don't preserve NUA eligibility.
• Disability exception. If you qualify under IRC § 72(m)(7), the penalty is waived on the cost basis distribution.
• The penalty math: For someone under 55, the 10% penalty on the cost basis portion adds cost. Run the numbers — even with the penalty, NUA can be better than a full IRA rollover if the NUA is large and the future ordinary rate is high.

When NUA makes sense vs. when to roll to an IRA

ACA MAGI coordination

The NUA distribution's ordinary income portion (the cost basis) counts as MAGI for ACA premium tax credit purposes in the distribution year. If your cost basis is $80,000 and you have $40,000 of other income, your distribution year MAGI is approximately $120,000 — well above the 2026 single-filer ACA cliff of $63,840 (400% FPL). You'd lose ACA subsidies for that year.

Planning approaches:

• Time the distribution in a year when you don't need ACA subsidies (e.g., you have employer coverage for part of the year).
• Plan to lose subsidies in one year if the lifetime NUA tax savings justify it — often they do by a large margin.
• Note the NUA appreciation itself is not MAGI in the distribution year — only the cost basis counts. The NUA is taxed as LTCG only when you sell the shares.

See Healthcare before 65 and tax-efficient withdrawal order for ACA MAGI planning framework.

Common NUA mistakes

1. Rolling to an IRA first, then reconsidering. Once the stock is in an IRA, NUA eligibility is permanently lost. There's no unwinding an IRA rollover for NUA purposes.
2. Partial distributions. Taking only the employer stock and leaving other plan assets behind doesn't qualify as a lump-sum distribution under IRC § 402(e)(4)(D). Everything must come out in the same tax year.
3. Confusing plan cost basis with investment cost basis. The plan's cost basis (what the plan paid for the shares) is what matters — not your personal account value at some earlier date. Ask the plan administrator for this number explicitly.
4. Not coordinating with ACA MAGI. The ordinary income spike from the cost basis distribution can eliminate ACA subsidies for the year. Plan the timing.
5. Assuming the Rule of 55 preservation trap doesn't apply. If you've already rolled the 401(k) to an IRA to preserve Roth conversion ladder or Rule of 55 flexibility, the NUA option disappears for that account. The order of operations matters.
6. Holding NUA stock forever "to avoid taxes." The NUA you deferred until death passes to heirs with a stepped-up cost basis — they can sell immediately at no gain. This is a planning strategy, but it requires holding the concentrated position for years and carries significant market risk.

NUA and the Roth conversion ladder

NUA and the Roth conversion ladder are generally alternative pre-59½ strategies, not complementary ones, because they compete for the same plan balance:

• The Roth conversion ladder converts pre-tax IRA assets to Roth IRA, then draws from Roth after the 5-year conversion seasoning period.
• NUA takes the employer stock out of the plan at LTCG rates, leaving less in the IRA for the conversion ladder.
• If your plan holds both employer stock and other assets (mutual funds, stable value), you can use NUA for the stock and a Roth conversion ladder for the remaining non-stock balance.

See Roth conversion ladder calculator and 401(k) early retirement access strategies.

Sources

Values verified as of June 2026. Tax values from IRS Rev. Proc. 2025-32; OBBBA adjustments per IRS announcements July 2025.

1. IRC § 402(e)(4) — Net Unrealized Appreciation, IRS.gov
2. IRS Notice 98-24 (NUA LTCG treatment) — IRS.gov
3. NUA Rules and Caveats — Kitces.com
4. Net Unrealized Appreciation — Fidelity
5. Net Unrealized Appreciation (NUA) — Charles Schwab