Net Unrealized Appreciation (NUA)
by Ryan Geary
Net Unrealized Appreciation (NUA): How to Unlock Tax
Advantages from Employer Stock in Your 401(k)
If you’ve accumulated company stock within your 401(k), you may be sitting on a unique tax
opportunity called Net Unrealized Appreciation (NUA). When used correctly, NUA can help
reduce taxes when moving retirement assets — but it’s a strategy that requires careful
planning and professional guidance.
opportunity called Net Unrealized Appreciation (NUA). When used correctly, NUA can help
reduce taxes when moving retirement assets — but it’s a strategy that requires careful
planning and professional guidance.
In this article, we’ll explain how NUA works, when it can be advantageous, and what to
consider before including it in your retirement plan.
What Is Net Unrealized Appreciation?
Net Unrealized Appreciation (NUA) refers to the increase in value of employer stock held
inside your qualified retirement plan — such as a 401(k).
inside your qualified retirement plan — such as a 401(k).
Here’s an example: If you purchased or were granted shares of company stock at $10 each
and they’re now worth $60, the $50 increase per share is your unrealized appreciation.
Under normal 401(k) withdrawal rules, the entire amount would be taxed as ordinary income
upon distribution. With NUA treatment, however, the growth in value can be taxed later at
long-term capital gains rates, which are generally lower than ordinary income tax rates.
How the NUA Strategy Works
NUA allows you to move your employer stock from a 401(k) into a taxable brokerage account
while transferring the rest of your plan into an IRA. This process is known as a lump-sum
distribution, and it can only be done after a qualifying event such as retirement, separation
from service, disability, or reaching age 59½.
while transferring the rest of your plan into an IRA. This process is known as a lump-sum
distribution, and it can only be done after a qualifying event such as retirement, separation
from service, disability, or reaching age 59½.
When executed correctly:
• You pay ordinary income tax on the cost basis (the amount originally paid for the shares).
• The unrealized appreciation (the increase in value) is deferred until you sell the stock.
• When sold, that appreciation is taxed at long-term capital gains rates rather than ordinary
income rates.
Why NUA Can Be Valuable
NUA can be particularly beneficial if:
• You hold highly appreciated employer stock in your 401(k).
• You anticipate being in a higher income tax bracket in retirement.
• You want to diversify your portfolio after leaving your employer.
For example, if your company stock was purchased for $20,000 and is now worth $200,000,
you would pay ordinary income tax only on the $20,000 basis. The remaining $180,000 of
appreciation could qualify for long-term capital gains treatment when sold — potentially saving
thousands in taxes.
• You hold highly appreciated employer stock in your 401(k).
• You anticipate being in a higher income tax bracket in retirement.
• You want to diversify your portfolio after leaving your employer.
For example, if your company stock was purchased for $20,000 and is now worth $200,000,
you would pay ordinary income tax only on the $20,000 basis. The remaining $180,000 of
appreciation could qualify for long-term capital gains treatment when sold — potentially saving
thousands in taxes.
When NUA Might Not Be the Best Option
Despite its benefits, NUA isn’t ideal for everyone. You might want to reconsider the strategy if:
• Your company stock hasn’t appreciated significantly.
• You expect to be in a lower income tax bracket in future years.
• You prefer to keep assets growing tax-deferred in an IRA.
• You have a large concentration of employer stock, which increases investment risk.*n
Because NUA requires a full distribution of your retirement plan, any missteps can lead to
unexpected tax consequences. Consulting a financial advisor and tax professional before
taking action is essential.
• Your company stock hasn’t appreciated significantly.
• You expect to be in a lower income tax bracket in future years.
• You prefer to keep assets growing tax-deferred in an IRA.
• You have a large concentration of employer stock, which increases investment risk.*n
Because NUA requires a full distribution of your retirement plan, any missteps can lead to
unexpected tax consequences. Consulting a financial advisor and tax professional before
taking action is essential.
Working with Your Advisor
At our firm, we help clients analyze whether NUA aligns with their overall financial plan. That
means reviewing your tax situation, diversification goals, and retirement income needs to
ensure any decision supports your long-term objectives.
means reviewing your tax situation, diversification goals, and retirement income needs to
ensure any decision supports your long-term objectives.
An NUA strategy can be powerful when executed within a coordinated, tax-aware financial
plan — but like most strategies, it’s most effective when customized to your individual
circumstances.
The Bottom Line
Net Unrealized Appreciation offers a unique way to unlock the value of employer stock held
within your 401(k) while potentially reducing taxes. However, it’s not a one-size-fits-all
solution. If you’re approaching retirement or considering rolling over your 401(k), talk with your
advisor to determine whether an NUA strategy makes sense for you.
within your 401(k) while potentially reducing taxes. However, it’s not a one-size-fits-all
solution. If you’re approaching retirement or considering rolling over your 401(k), talk with your
advisor to determine whether an NUA strategy makes sense for you.
Footnotes
1. NUA treatment applies only to employer securities distributed from qualified plans. Rules and eligibility vary by
plan and individual tax circumstances. Consult a qualified tax professional before making any distribution or
rollover decisions.
2. Long-term capital gains rates depend on income level and holding period. Ordinary income tax applies to the
cost basis of distributed shares.
3. A “qualifying event” includes separation from service, disability, death, or reaching age 59½. The entire balance
must generally be distributed in one tax year for NUA to apply.
4. Illustrative example for educational purposes only. Actual tax results depend on individual circumstances,
holding periods, and market conditions.
5. Holding concentrated stock positions increases portfolio risk and volatility. Diversification does not ensure profit
or protect against loss in declining markets.