Net Unrealized Appreciation (NUA): The Secret Tax Break for Company Stock
Net Unrealized Appreciation (NUA): The Secret Tax Break for Company Stock
COACHING POINTS
- The Trap: Most retirees blindly roll over their entire 401(k) balance into an IRA. If you hold highly appreciated company stock (e.g., Apple, Microsoft) inside that 401(k), rolling it over converts potential capital gains into high-tax Ordinary Income.
- The Exception: The NUA Rule allows you to distribute company stock to a taxable brokerage account. You pay income tax only on the original cost basis. The growth (appreciation) is taxed at the lower Long-Term Capital Gains rate.
- The Result: On a stock that has grown 10x, this strategy can cut your tax bill in half, saving tens of thousands of dollars instantly.
If you worked for a successful company for 20 years and accumulated its stock in your 401(k), the IRS has a special gift for you—but only if you ask for it correctly. Rolling over company stock to an IRA is often a mistake. It takes an asset that qualifies for a 15% tax rate (Capital Gains) and voluntarily transforms it into an asset taxed at 37% (Ordinary Income). Source: IRS Publication 575 (Pension and Annuity Income)
Scenario: You have $1,000,000 of Company Stock in your 401(k). Your Cost Basis (what you paid) is only $100,000.
- Strategy A (Standard Rollover to IRA):
You move $1M to an IRA. Later, you withdraw it.
Tax Rate: Ordinary Income (e.g., 37%).
Total Tax Bill: $370,000. - Strategy B (NUA Election):
1. You distribute the stock “in-kind” to a brokerage account.
2. You pay Income Tax (37%) on the $100k basis = $37,000.
3. You sell the stock and pay Capital Gains (20%) on the $900k growth = $180,000.
Total Tax Bill: $217,000. - Result: The NUA strategy saved you $153,000 in taxes simply by checking a different box on the withdrawal form.
Tax Savings Visualization
| Strategy | Total Tax Liability ($) |
|---|---|
| Standard Rollover (IRA) | 370000 |
| NUA Election | 217000 |
*By treating the growth as Capital Gains rather than Ordinary Income, the NUA strategy creates massive tax efficiency for long-held company stock.
What-If Scenario: When NOT to use NUA
Comparison: High Basis vs. Low Basis stock.
| Stock Condition | Cost Basis Ratio | Recommendation | Score (0-100) |
|---|---|---|---|
| Highly Appreciated | 10% (Low Basis) | Use NUA | 95 |
| Recently Bought | 90% (High Basis) | Rollover to IRA | 10 |
Execution Protocol
You cannot just do NUA whenever. It must be done after a “Triggering Event”:
1. Turning age 59½.
2. Separation from service (quitting/retiring).
3. Death or Disability.
This is the most critical rule. You must empty the entire 401(k) account in a single calendar year. You can roll the non-stock cash to an IRA, but the company stock must go to a taxable account in the same year. If you leave $1 behind, you disqualify the NUA.
Do not sell the stock inside the 401(k)! If you sell it and transfer cash, NUA is gone forever. Instruct the custodian to transfer the shares directly to your taxable brokerage account.
COACHING DIRECTIVE
- Do This: Check your 401(k) statement for “Cost Basis” vs. “Market Value” of company stock. If the basis is less than 30% of the value, investigate NUA immediately.
- Avoid This: Rolling over everything to an IRA on autopilot. Once the stock hits the IRA, the NUA option is permanently extinguished. There is no “undo” button.
Frequently Asked Questions
Does this apply to mutual funds?
No. NUA applies strictly to employer securities (company stock) held within the plan. Mutual funds or ETFs do not qualify.
When do I pay the 15-20% tax?
You pay the Ordinary Income tax on the basis immediately in the year of distribution. The Capital Gains tax on the appreciation is deferred until you actually sell the shares in the brokerage account.
What about the 3.8% NIIT?
Yes, the Net Investment Income Tax applies to the capital gains portion if your income is high enough. Even with NIIT, the total rate (23.8%) is usually far lower than the top income tax rate (37%).