Net Unrealized Appreciation (NUA)
Employers that offer a 401(k)-retirement plan may also allow employees to invest their account in their employer’s stock. Over time, as the employer’s stock does well, employees may find themselves with a large portion of their retirement portfolio invested in their company’s stock. Typically, this stock owned has a very low-cost basis or purchase price. At retirement, a 401(k) plan is normally rolled over into an Individual Retirement Account (IRA) and any withdrawals taken are fully taxable at ordinary income rates.
If you find yourself in this situation, there is a tax strategy you can utilize referred to as “net unrealized appreciation.” The IRS allows gains in the employer stock to be taxed at long-term capital gains rates rather than ordinary income as long as certain qualifications are met. Tax rates change yearly, so here is an overview of what threshold you may fall into based on income and tax filing status in 2025.
Long-Term Capital Gain Tax Rates (2025)
Single
$0 to $48,350 0%
$48,351 to $533,400 15%
$533,401 or higher 20%
Married Filing Joint
$0 to $96,700 0%
$96,701 to $600,050 15%
$600,051 or higher 20%
Long-term capital gains rates are lower than ordinary income tax rates. So, using this strategy can save a lot of money in taxes, especially if you have a prominent position in your employer’s stock. Net unrealized appreciation is simply the difference between the cost basis of the employer shares and the current fair market value. Again, specific requirements must be met to utilize this strategy.
- The entire 401(k) balance must be distributed in a lump sum to elect NUA at retirement. The employer stock must transfer to a non-retirement account, such as an individual brokerage account. The remainder of your 401(k) funds not invested in your company stock must be distributed into a retirement account. They can be rolled over to an IRA, for example.
- The employer stock you would like to elect NUA treatment on must be moved “in kind.” This means the shares must be transferred to a non-retirement account. The shares should not be sold first, and then, as a result, cash is moved to a non-retirement account.
- There needs to be a “qualifying event.” In other words, there must be separation from the company, reaching age 59.5, total disability, or death. Most of the time, NUA tax treatment is elected upon retirement.
Once NUA is elected and shares are moved out of the 401(k) plan, you must immediately pay income taxes on the cost basis of the shares. For example, if the cost basis at the time of purchase was $5 and you own 10,000 shares, you must pay income tax on $50,000. If the stock has a current fair market value of $50, you can sell the shares and pay long-term capital gain taxes on the $45 gain. Any sale of stock using NUA benefits from a lower tax rate, which leaves more money in your pocket to spend.
When deciding if electing NUA suits you, you must also look at the tradeoff for this benefit. If NUA is not elected, you will pay taxes at a higher income rate. However, if withdrawals are not taken for years down the road, you can defer your taxation which can be valuable. When NUA is elected, there is immediate taxation on the cost basis of the shares. This cost can be significant unless the basis is relatively low. Therefore, NUA works best with highly appreciated company stock.
Remember that this strategy can be complex if you are considering NUA tax treatment for your distribution. There are many data points to consider, and not everyone’s employer-sponsored 401(k) plan offers company stock. Discussing the tax impact with your Certified Public Accountant (CPA) to implement the best strategy for your financial circumstance is recommended.
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