NUA Explained: The 401(k) Tax Strategy Most People Miss

Net unrealized appreciation, or NUA, is a tax strategy for company stock held inside a 401(k) or employee stock ownership plan. It lets the built in gain on that stock be taxed at long term capital gains rates instead of ordinary income rates.

This article covers what NUA is, how it works, the advantages and disadvantages, and the analysis to run before you act.

What is net unrealized appreciation (NUA)?

Your company stock has two parts: the cost basis, which is what was paid for it, and the gain that built up while the shares sat inside your retirement plan. That gain is the net unrealized appreciation.

Normally, every dollar that comes out of a 401(k) or traditional IRA is taxed as ordinary income, where the top federal rate is 37%. Long term capital gains are taxed at 0%, 15%, or 20% for most people. The NUA strategy uses that gap.

How the NUA strategy works

When you leave your employer or reach another qualifying event, you split the account. The company stock moves as actual shares into a regular taxable brokerage account, called an in kind transfer, and everything else can still roll into your IRA.

In that year you pay ordinary income tax on only the cost basis. The NUA is taxed later, at long term capital gains rates, whenever you choose to sell. Two rules are strict:

• Lump sum distribution. You empty the entire plan within one calendar year.
• Qualifying triggering event. Leaving your job, reaching age 59 and a half, becoming disabled, or death.

Miss either rule and the strategy can fall apart.

NUA example with $300,000 of company stock

Say you have company stock in your 401(k) worth $300,000 with a cost basis of $60,000, so the NUA is $240,000. You pay ordinary income tax on the $60,000 basis this year, roughly $13,000 at around the 22% bracket. When you sell later, the $240,000 is taxed as long term capital gains, which at 15% is $36,000. Total tax is very roughly $49,000.

If you roll everything into an IRA instead, that $300,000 eventually comes out as ordinary income. At 22%, that is $66,000, and large withdrawals often push you into higher brackets. In this example NUA saves somewhere around $17,000, and for higher earners the gap gets much wider.

Advantages of NUA

• Control over timing. You can sell gradually and try to stay inside the lower capital gains brackets. In 2026, a married couple can have up to roughly $99,000 of taxable income and still pay 0% on long term capital gains.
• No required minimum distributions. Shares in a taxable account are not subject to forced withdrawals.
• A tax friendly path to diversify. You can trim the position over time at the lower rate.

Disadvantages and risks of NUA

• You owe tax now. Tax on the cost basis is due in the year of the distribution, ideally paid with money from outside the retirement account.
• You give up tax deferred growth. Future dividends and gains become taxable as you go.
• Concentration risk. This is the one I worry about most. NUA only makes sense when you hold a large position in a single company's stock, and the tax savings will not comfort you if that stock falls 40%.
• No step up in basis. The NUA portion does not get a step up when you pass away, so your heirs would still owe capital gains tax on it.
• It is unforgiving. One stray distribution in the wrong year, or accidentally rolling the shares into an IRA, can permanently lose the NUA treatment.

When does NUA make sense?

The most important number is the ratio of your cost basis to the current value of the stock. As a rough guide, a basis under about 25% or 30% of the value often looks very attractive. The example above is a 20% ratio. If the basis were $210,000 on the same $300,000, a 70% ratio, you would pay ordinary income tax on $210,000 today to save on a $90,000 gain. That usually does not make sense.

A few other factors matter:

• Tax bracket. The strategy is stronger in a lower income year, often the year you retire.
• Time horizon. If you expect to sell fairly soon, NUA tends to win. If the shares would sit untouched for 30 years, the math gets closer.
• Ripple effects. A large spike of income can raise your Medicare premiums about 2 years later.
• Partial use. You can apply NUA to only your lowest basis shares and roll the rest into your IRA.

This is a numbers exercise. Run it both ways, with NUA and without it, and compare the total tax over time.

Common questions

Can you use NUA after rolling a 401(k) into an IRA?

No. Once the shares are inside an IRA, the NUA opportunity is gone for good, so check before you roll over a 401(k) that holds company stock.

Do you have to hold NUA stock for a year to get long term capital gains?

The long term rate on the NUA portion is automatic, even if you sold the very next day.

What cost basis makes NUA worth it?

As a rough guide, NUA often looks very attractive when your cost basis is under about 25% or 30% of the stock's value.

VDB Wealth is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Imagine two people who retire in the same year. Same age, same employer, and each one is holding about half a million dollars of their company's stock inside their 401(k).

The first person does what almost everyone does. They roll the whole account into an IRA. The second person uses a strategy called Net Unrealized Appreciation. Years later, when they each sell that stock, the second person has paid tens of thousands of dollars less in tax. Same shares, same company, same value.

The only thing that changed was one decision, made in a single tax year. And it is a decision most people never even hear about. Today I am going to make sure you are not one of them.

Here is the plan for the next few minutes. First, what Net Unrealized Appreciation actually is, in plain English. Then how it works, step by step, with a real example and real numbers. Then the advantages, the disadvantages, because there are real downsides here, and finally the analysis you should run before you ever act on it.

This matters because company stock inside a retirement plan is one of the few places where the default move, rolling everything into an IRA, can quietly be the wrong move. And once those shares are inside an IRA, this opportunity is gone for good. There is no undo button.

Quick note on who I am. I am Andy with VDB Wealth, a wealth manager who helps individuals and families make smart, tax aware decisions with their money. I have walked clients through this exact choice, and my goal today is to hand you the same framework I use with them.

Let's start with the core idea. Many companies let employees own company stock inside their 401(k) or their employee stock ownership plan. Over the years you accumulate those shares, and hopefully they grow.

Now picture that stock as having two parts. The first part is what you paid for it. In tax language, that is your cost basis. The second part is everything it grew on top of that. That growth, the gain that built up while the shares sat inside your retirement plan, is the Net Unrealized Appreciation. Unrealized simply means you have not sold yet. So Net Unrealized Appreciation, or NUA for short, is just the built in gain on your employer stock.

Here is why that distinction matters so much. Normally, every dollar that comes out of a 401(k) or a traditional IRA is taxed as ordinary income. That is the same kind of tax you pay on a paycheck, and the top federal rate is 37 percent. Long term capital gains, the tax you pay when you sell an investment, are taxed far more gently. For most people that rate is zero, 15, or 20 percent.

The NUA strategy does something clever with that gap. It lets the large built in gain on your company stock be taxed at the lower capital gains rates instead of the higher ordinary income rates. You are taking income that could have been taxed at up to 37 percent and moving it down to, for most people, 15 percent. On a large position, that is real money.

So how do you actually do it? Here is what happens mechanically.

When you leave your employer, or you reach another qualifying moment, instead of rolling your whole 401(k) into an IRA, you split it. The company stock comes out as actual shares and moves into a regular taxable brokerage account. That is called an in kind transfer, because the shares move as shares. They are not sold. Everything else in the plan, the mutual funds and other investments, can still roll into your IRA the normal way.

In the year you do this, you pay ordinary income tax on only the cost basis of the stock, the amount that was originally paid for it. The big built in gain, the NUA, is not taxed yet. It gets taxed later, at long term capital gains rates, whenever you choose to sell the shares. And here is a nice detail. That capital gains treatment on the NUA is automatic. Even if you sold the very next day, the NUA portion would still get the long term rate.

Let's put real numbers on it. Say you have company stock in your 401(k) worth 300,000 dollars. The cost basis, what was originally paid for those shares, is 60,000 dollars. That means your NUA, the built in gain, is 240,000 dollars.

With the NUA strategy, you move the shares into a brokerage account and pay ordinary income tax on the 60,000 dollar basis this year. If that is taxed around the 22 percent bracket, that is roughly 13,000 dollars of tax today. Then later, when you sell, the 240,000 dollars of NUA is taxed as long term capital gains. At 15 percent, that comes to 36,000 dollars. Your total tax, very roughly, is about 49,000 dollars.

Now compare that to the standard move, rolling the whole account into an IRA. Eventually that 300,000 dollars, plus whatever it grows to, comes out as ordinary income. At a 22 percent rate, 300,000 dollars is 66,000 dollars of tax, and large withdrawals often push you into higher brackets than that. So in this example, NUA saves somewhere around 17,000 dollars. For higher earners, that gap gets much wider.

Two rules make this work, and they are strict. First, it must be a lump sum distribution. That means you empty the entire plan within one single calendar year. Second, it must follow a qualifying triggering event. Those events are leaving your job, reaching age 59 and a half, becoming disabled, or death. Miss either rule and the whole strategy can fall apart. This is a step you take carefully, and ideally with guidance.

Let's talk about the advantages, because when this fits, it fits well.

The headline benefit is the one we just saw. You convert what could be a very large ordinary income tax bill into a smaller capital gains bill. For someone with a large, highly appreciated position, that can be a five or even six figure difference over time.

Second, you control the timing. Once the shares sit in a regular brokerage account, you decide when to sell. You can sell gradually, spread the gains across several years, and try to stay inside the lower capital gains brackets. In 2026, a married couple can have up to roughly 99,000 dollars of taxable income and still pay zero percent on long term capital gains. That is a genuine planning tool.

Third, there are no required minimum distributions on those shares. Money left inside a traditional IRA eventually forces you to take withdrawals every year, whether you want them or not. Stock you have moved out under NUA lives in a taxable account, so it is not subject to those forced withdrawals.

Fourth, charitable giving becomes easier. If you give to charity, appreciated stock in a brokerage account is one of the best assets you can donate. You can give the shares directly and skip the capital gains tax on them entirely.

And fifth, it gives you a tax friendly path to diversify. Many people feel stuck. They are nervous about holding so much of one company, but also nervous about a big tax bill if they sell. NUA gives you a way to trim that position over time with the lower tax rate working in your favor.

Now the other side of the ledger, because this is not free money, and the disadvantages matter just as much.

First, you owe tax now. The ordinary income tax on the cost basis is due in the year you do the distribution. If your basis is large, that is a real bill, and ideally you pay it with money from outside the retirement account so the whole strategy stays intact.

Second, you give up tax deferred growth. Inside an IRA, everything compounds with no tax along the way until you withdraw. Once the stock sits in a taxable account, future dividends and future gains become taxable as you go.

Third, concentration risk, and this is the one I worry about most. NUA only makes sense when you hold a large position in a single company's stock. A large bet on one company carries real risk. The tax savings will not comfort you if that stock falls 40 percent.

Fourth, an estate planning quirk. Most investments receive what is called a step up in basis when you pass away, which can erase the built in gain for your heirs. The NUA portion does not get that step up. Your heirs would still owe capital gains tax on it.

And fifth, it is unforgiving. The lump sum rule is strict. One stray distribution from the plan in the wrong year, or accidentally rolling the shares into an IRA, and you can permanently lose the NUA treatment. There is no fixing it afterward.

So how do you actually decide? Here is the analysis I walk through with clients.

The single most important number is the ratio of your cost basis to the current value of the stock. Remember, you pay ordinary income tax on the basis today in order to unlock capital gains treatment on the gain. So the smaller your basis is compared to the total value, the better the deal.

Here is a rough guide. If your cost basis is a small slice of the value, say under about 25 or 30 percent, NUA often looks very attractive. Go back to our example. Sixty thousand dollars of basis on 300,000 dollars of stock is a 20 percent ratio. That is a strong candidate. Now flip it around. If your basis were 210,000 dollars on that same 300,000 dollars of stock, a 70 percent ratio, you would be paying ordinary income tax on 210,000 dollars today just to save on a 90,000 dollar gain. That usually does not make sense, and rolling everything into the IRA is likely the better call.

Second, your tax bracket. The best time to recognize that basis as income is in a lower income year. Often that is the year you retire, after your paycheck stops but before Social Security and required distributions begin. Doing this in a low bracket year makes the strategy much stronger.

Third, your time horizon. The longer you would leave money compounding inside the IRA, the more that tax deferral works in the IRA's favor and narrows the NUA advantage. If you expect to sell and use the money fairly soon, NUA tends to win. If those shares would sit untouched for thirty years, the math gets closer.

Fourth, the ripple effects. A large spike of income in one year can raise your Medicare premiums about two years later, and it can affect other income tested benefits. That does not kill the strategy, but it belongs in the calculation.

And fifth, remember it does not have to be all or nothing. You can apply NUA treatment to only your lowest basis shares, the best candidates, and roll the rest into your IRA. A careful analysis often lands on a blend, not an all in answer.

The real takeaway is that this is a numbers exercise. You run it both ways, with NUA and without it, you compare the total tax over time, and then you let the math make the decision.

Let's bring it together. Net Unrealized Appreciation is a strategy for company stock held inside a retirement plan. It lets you pay ordinary income tax on just the cost basis, and then have the built in gain taxed at lower long term capital gains rates. It can save a meaningful amount of tax, but the answer depends heavily on your cost basis ratio, your age, your tax bracket, and your time horizon. And because the choice is irreversible, it is worth slowing down to get right.

If you take one thing away, let it be this. Before you roll over an old 401(k) that holds company stock, stop and check whether NUA applies. That single pause can be worth tens of thousands of dollars.

If you are holding company stock and wondering whether this fits your situation, I would be glad to help you think it through. Reach out with your questions, and we can look at your actual numbers together. My contact information is below this video. Thanks for watching, and I will see you in the next one.