Compare NUA tax strategy vs IRA rollover for employer stock in your 401(k). See potential tax savings.
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Helen, 52, senior accountant, is leaving a Fortune 500 company after 14 years. Her 401k holds 2,200 shares of company stock with a cost basis of $18/share ($39,600 total). Current price: $72/share (FMV $158,400). She's weighing NUA treatment vs rolling everything to an IRA.
Takeaway: NUA treatment (IRC §402(e)(4)) allows appreciation on employer stock to be taxed at long-term capital gains rates (15%) instead of ordinary income rates. Helen pays ordinary income tax only on the $39,600 basis at distribution, then 15% LTCG on the $118,800 gain when she eventually sells. She must take a lump-sum distribution in a single tax year from a qualifying event. Consult a CPA — this is complex but high-value.
The NUA tax break (IRC §402(e)(4)) applies only to employer securities distributed in a lump-sum from a §401(k), §403(b), or pension — not IRAs, brokerage accounts, or ESPP shares. The entire account must be distributed in a single tax year after a triggering event (separation from service, age 59½, death, or disability). Partial distributions disqualify NUA treatment.
At NUA distribution, you pay ordinary income tax on the plan's cost basis of the stock — not the FMV. A $100k cost basis distributed with $400k NUA triggers immediate ordinary income tax on $100k. At a 24% rate, that is $24,000 due now. This upfront tax is not optional.
The NUA portion qualifies for LTCG rates regardless of how long the stock was held inside the plan. If you sell before holding the distributed shares for >1 year, only the NUA qualifies for LTCG; any post-distribution appreciation is short-term. Selling immediately after distribution is still LTCG on the NUA portion.
Rolling the employer stock to an IRA defers all tax until withdrawal at ordinary income rates. NUA strategy converts NUA gains to LTCG (0–20%) at the cost of paying ordinary income on cost basis today. The NUA strategy wins when NUA is large relative to cost basis, current bracket is lower than expected future bracket, and holding period is extended.
Roth vs Traditional IRA CalculatorAn NUA distribution can spike MAGI by $200k–$500k — triggering Medicare IRMAA surcharges of $594–$2,023/person two years later, plus 3.8% NIIT on investment income above $200k single / $250k MFJ. Timing the distribution relative to other income events is critical.
Based on your inputs
| Employer Stock Value | $500,000 |
|---|---|
| Cost Basis | $100,000 |
| Net Unrealized Appreciation | $400,000 |
| Tax on Cost Basis (32% ordinary) | $32,000 |
| Tax on NUA (15% LTCG) | $60,000 |
| Total Tax (NUA Strategy) | $92,000 |
| Total Tax (IRA Rollover) | $160,000 |
| Tax Savings | $68,000 |
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NUA is the difference between the current market value of employer stock in your 401(k) and what your employer originally paid for it (cost basis). When you take a qualifying lump-sum distribution:
• Cost basis: Taxed as ordinary income (like a normal 401(k) distribution)
• NUA: Taxed at long-term capital gains rates when you sell the stock
• Additional gains after distribution: Taxed at short-term or long-term capital gains depending on holding period
Without NUA: Roll everything to IRA → all withdrawals taxed as ordinary income (up to 37%)
With NUA: Distribute employer stock to taxable brokerage → cost basis taxed as ordinary income now, NUA taxed at LTCG rates (0-20%) when sold
The tax savings can be massive. If you have $500,000 of employer stock with $100,000 cost basis, the $400,000 NUA is taxed at 15-20% LTCG instead of 22-37% ordinary income. That's potentially $68,000-$148,000 in tax savings.
All four conditions must be met:
1. Triggering event: Separation from service (not for self-employed), reaching age 59½, disability, or death
2. Lump-sum distribution: Entire vested balance distributed in one tax year
3. Employer securities: Must be actual employer stock (not just funds)
4. Distribution to taxable account: Stock goes to a regular brokerage account, not an IRA
NUA lets you pay long-term capital gains tax on employer stock appreciation in your 401(k) instead of ordinary income tax. You distribute the stock to a taxable account and only pay ordinary income tax on the cost basis.
NUA works best when the appreciation (NUA) is large relative to cost basis, you're in a high ordinary income tax bracket, and the LTCG rate is significantly lower than your ordinary rate.
You may want to take a lump-sum distribution of your ENTIRE 401(k) balance. However, you can roll non-stock assets to an IRA while taking the NUA distribution on employer stock.
Additional gains beyond the NUA are taxed at short-term or long-term capital gains rates based on holding period after distribution. The NUA itself always gets LTCG treatment.
You may want to experience one of four qualifying events: separation from service from your employer, reaching age 59 and a half, becoming disabled, or death. Self-employed individuals cannot use separation from service as a trigger.
The cost basis is the original price your employer paid for the stock when it was contributed to your 401(k) plan. Your plan administrator can provide this figure. Only this cost basis amount is taxed as ordinary income upon distribution.
NUA provides little benefit when appreciation is small relative to cost basis. If your stock doubled or tripled in value, the tax savings are significant. If it barely appreciated, rolling everything to an IRA may be simpler.
With NUA, the stock goes to a taxable brokerage account and appreciation is taxed at capital gains rates. With an IRA rollover, all future withdrawals are taxed as ordinary income at rates up to 37 percent.
No. You can hold the stock as long as you want after distribution. The NUA portion receives long-term capital gains treatment whenever you sell. Any additional appreciation after distribution follows standard holding period rules.
NUA distributions may qualify for special 10-year averaging if the participant was born before 1936. For most current retirees, this does not apply, and the standard NUA rules of ordinary tax on basis plus capital gains on appreciation are used.
NUA = Current Stock Value − Cost Basis
NUA Strategy Tax = (Cost Basis × Ordinary Rate) + (NUA × LTCG Rate)
IRA Rollover Tax = Stock Value × Ordinary Rate (at withdrawal)
Every formula on this page traces to a federal agency, central bank, or peer-reviewed institution. We cite the rule-makers, not secondhand blogs.
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Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.