Understanding the Basics: What is NUA?

Net Unrealized Appreciation (NUA) is a powerful tax tool available when you hold employer stock inside your 401(k) plan. What makes NUA a tax gem? Typically, withdrawing money from a 401(k) is taxed as ordinary income at your regular income tax rate. NUA lets you swap some of that high tax for the much lower long-term capital gains rate. If you have company stock that’s grown well over the years, NUA means you could pay the IRS less—sometimes A LOT less.

You should care about NUA if you’re sitting on company stock in your 401(k) that’s worth way more today than when you received or bought it. This is your ticket to unlock meaningful tax savings, but only if you play it by these special rules.

Why NUA Matters for Company Stock in 401(k) Plans

When you have company stock in your 401(k), you’re in a unique position. The IRS allows you a better tax deal for the growth on that stock than for your regular cash, mutual funds, or bonds in the plan. Most people jam all their assets into an IRA after leaving a job, missing out on the NUA strategy entirely. This is a rare opportunity, but you must understand the process to utilize it effectively.

Who Does This Strategy Apply To?

If you’re a physician, you might think, “I don’t get company stock from my job.” But step back for a moment. Many physicians are married to people who work in tech or big pharma—fields where company stock inside a 401(k) is much more common. This strategy isn’t just for the high-flying tech workers in Silicon Valley. Think about your spouse or partner. If they work in one of these industries, you may have more options than you realize:

• Tech companies
• Pharmaceutical corporations
• Senior executives or key employees at large public firms

It’s easy to pass over this if you’ve never seen company stock in a retirement plan before. But if your household includes someone in these sectors, this could be directly relevant. High-earning families and dual-income couples stand to gain the most in both the short and long term.

Identifying Your “Sweet Spot”: When NUA Makes Sense

NUA isn’t worthwhile for every 401(k). It shines when your company stock is highly appreciated—meaning its value has climbed quite a bit from what you paid or were granted. What counts as “highly appreciated”? If you bought or received $100,000 of company stock and it’s now worth $200,000, you’re looking at a $100,000 gain—that’s significant. It could be even more pronounced during a prolonged bull market.

To check if NUA might work for you:

1. Review your 401(k) statement or online dashboard.
2. Look for company stock holdings.
3. Compare the cost/price you paid versus the current value.
4. If the difference is sizable, especially with six figures at stake, NUA could be a fit.

Even a moderate gain can make the numbers work. If you see only a minor bump or a loss, NUA is less likely to help.

The Three Key Rules to Qualify for NUA

To unlock NUA benefits, you must follow these 3 essential rules. Get any one wrong, and the tax savings vanish.

Triggering Event: What Counts?

You need a triggering event—a moment the IRS says it’s OK to unlock NUA. These include:

• Turning age 59½ or older
• Separating from your employer (this could be leaving for another job, retirement, or layoff)
• Death (in which case your beneficiary can use NUA)

For most people, separation from service is the trigger. Maybe you switched jobs last year, or you’re about to retire. If you’re the heir to a 401(k) account with company stock, NUA could also benefit you.

This means not just what happens while you’re working, but also what happens when you change jobs—or, if you pass away, what your heirs can do.

Complete Distribution Within One Calendar Year

There’s a strict requirement: you have to withdraw your entire 401(k) plan in a single calendar year. The move doesn’t have to be in the year you left your job; you might wait and time it for a year when your income is lower.

For example, if you have $100,000 in company stock and $150,000 in mutual funds or other investments, you must withdraw all $250,000 out of the 401(k) in the same year. If you only take part of it, you lose the NUA opportunity.

Proper planning is a must because missing this window means losing the tax break entirely.

Proper Distribution Destination — Avoiding the IRA Trap

Here’s where big mistakes get made. Most folks roll their 401(k) balance into a new IRA, thinking it’s the safe move. With NUA, don’t do that with the company stock. If you roll company stock into an IRA, you kill all NUA tax benefits.

• Company stock must go to a taxable (non-IRA) brokerage account.
• The rest of your 401(k) can go to an IRA, your next 401(k), or stay in cash.
• For those in their saving years, sending the non-stock portion to their new workplace 401(k) may make sense.

This is the single most crucial step to get right. Carve out the company stock, send it to a taxable account, and only then handle your other 401(k) assets.

Why Go Through All This Effort? The Tax Benefits Explained

NUA planning unlocks a powerful shift in your tax bill. There are three tax phases at play:

• Your original purchase price (called your basis)
• The built-in gain (the NUA portion)
• Any growth after you move stock to your taxable account

For example, suppose you bought or received company stock for $100,000, and today it’s worth $250,000. That means you have $150,000 of NUA.

When you move the stock to your taxable account:

• The $100,000 basis gets taxed as ordinary income once (often at a high rate since you take it all at once)
• The $150,000 NUA portion will be taxed at the much lower long-term capital gains rate when you sell, even if you sell it right away.

If you weren’t aware of NUA and just rolled the whole amount to an IRA, the IRS would tax all $250,000 as ordinary income when you withdraw it. And any gains after that would still count as ordinary income. So, with NUA, you replace a big chunk of higher-taxed money with a much friendlier rate.

Immediate Tax on Basis: The “Sting”

The catch? The basis amount—what you paid for the stock—gets taxed as ordinary income all at once when you make the move. For households in a high tax bracket, this can sting. Prepare for the bill, plan ahead, and don’t let it knock you back. Often, the benefit of turning the bigger gains into long-term capital gains more than makes up for this upfront tax.

The Big Win: NUA Portion as Long-Term Capital Gains

The real magic with NUA is that the gain between your purchase price and the current value is taxed as a long-term capital gain—even if you sell the stock immediately after transferring it to your brokerage account. This means that instead of paying, say, 35% or 37% (or higher with surcharges in some states), you’re likely to pay just 15-20% on this chunk of money. That’s real savings, and it can add up fast if you have significant appreciation.

Post-Distribution Growth and Tax Treatment

If your company stock keeps climbing after you move it to your taxable account, any further gains above that initial value are taxed differently. Sell after holding for at least a year and a day, and you pay long-term capital gains on the new gains. Sell before that, and they’re hit as short-term capital gains (just like ordinary income).

For instance, say that the stock goes from $250,000 to $350,000 after you move it over. The extra $100,000 of new gain gets its own holding period clock. Wait a year and a day for the best rate.

Why This Strategy Is Such a Win

Compare two options:

• Roll your whole 401(k) into an IRA (the default choice for most retirees), then withdraw later. Every dollar you take out is taxed as ordinary income. That hurts.
• Use NUA: Only the cost basis (your purchase price) gets ordinary tax, while the appreciation gets long-term capital gains rates.

With the example above, that’s $100,000 taxed as ordinary income and $150,000 taxed at the lower capital gains rate. In some cases, you could save tens of thousands or more just by handling that stock properly.

The more the company stock has grown, the bigger the win. Even with modest gains, the change in tax rate makes a difference. With larger gains, the savings multiply.

Special Considerations for Those Under Age 59½

Are you or your spouse under 59½? You need to know about the early withdrawal penalty. When you use NUA before you hit 59½, there’s a 10% penalty on the basis portion only (not the gains). Not fun, but don’t write off NUA right away. The potential long-term savings can still be much larger than the one-time penalty—especially when the growth is sizable.

Always sit down with a skilled accountant or financial planner before pulling the trigger. Run the numbers, compare scenarios, and see which strategy puts you ahead.

Communication with Your Accountant: Avoid Missed Opportunities

One of the easiest ways to mess up NUA is tanking the tax treatment during filing season. Here’s why: Tax forms your accountant receives don’t spell out that your gains came from an NUA transaction. Unless you flag it, most accountants will treat that gain as regular investment income—which means you could get stuck paying the net investment income tax (NIIT) of 3.8% unnecessarily. NUA gains don’t trigger NIIT, so you want to be sure the right boxes get checked.

Tell your tax pro in writing that you’ve used an NUA strategy. That way, no surprises and no missed savings. Make this clear every year when you provide info for your tax return, because the forms on their own won’t do it.

What About Private Company Stock?

NUA isn’t just for workers with public companies. If you have private company stock inside your 401(k), you may still qualify, but the road is more complex. The plan must allow it, and different employer plans have varying rules for handling the stock.

There are three common scenarios, each with its own twists. If you’re in this situation, contact your plan administrator to see which rules apply.

How to Get Started: Checking Your Eligibility and Taking the First Steps

Ready to find out if NUA could save your family a hefty sum? Start with this quick checklist:

• Does your 401(k) hold company stock?
• Has that company stock grown sharply since you bought or received it?
• Have you had, or expect to have, a triggering event (turning 59½, leaving your employer, or inherited as a beneficiary)?

If you answer “yes” to all three, you may be. Next steps: Don’t wing it. Work with a tax professional or financial advisor who knows the nuances of NUA. Missing one rule can wipe out all the gains from this tax break.

Common Mistakes to Avoid with NUA Strategy

Avoiding errors is half the battle. Watch for these frequent tripwires:

• Rolling your entire 401(k), including company stock, into an IRA: This destroys the NUA opportunity.
• Missing the one-year distribution window: If you don’t move all funds in a single calendar year, you’re out.
• Not separating company stock from mutual funds/bonds: Only company stock gets NUA benefits.
• Ignoring the early withdrawal penalty if under 59½: Don’t get caught off-guard—factor this into your math.
• Not telling your tax preparer about the NUA transaction: Mistakes here can trigger more taxes than necessary.

Stay alert. Review these pitfalls when planning each step.

Passing the Benefits to Your Heirs

If you pass away with company stock still inside your 401(k), your beneficiary (often a spouse or child) can still use the NUA strategy. This can mean a significant tax break for your family, allowing you to pass on more wealth rather than paying more taxes. It adds an extra layer of value to your estate plan, so loop in everyone involved—spouses, adult children, and your estate planning team.

Summary Checklist for NUA Strategy Success

Before moving your company stock, review this step-by-step guide:

1. Confirm your 401(k) holds highly appreciated company stock.
2. Check that a triggering event (age, job change, or inheritance) has happened or is about to.
3. Plan to distribute 100% of your 401(k) in a single calendar year after the event.
4. Move your company stock specifically to a taxable brokerage account—do not let it land in an IRA.
5. Handle the remaining 401(k) assets (mutual funds, cash, etc.) by rolling to an IRA, new plan, or other choice.
6. Get ready for a tax bill on the cost basis portion.
7. Flag the NUA transaction to your accountant or financial advisor every year at tax time.
8. Plan when you’ll sell the company stock, targeting long-term capital gains where possible.
9. If under age 59½, weigh the 10% penalty versus long-term savings.
10. For private company stock, check your plan rules and consult an expert.

Final Thoughts

NUA isn’t for everyone, but if your household has company stock in a 401(k) with significant gains, this is one of the best IRS-approved moves around. Don’t leave money on the table by skipping the details or lumping all your assets together in a rollover. The rules are tricky, but the reward—a lighter tax bill and more for your family—makes it worthwhile.

If you want more details on advanced planning or have a trickier situation (like private company shares), reach out to a professional or connect with WealthKeel’s team for resources, newsletters, or future YouTube Q&A sessions.

Stay sharp, stay informed, and don’t miss out on your own tax gem.