NUA: What to Know Before You Roll Over Company Stock

Key Takeaways:

• Net Unrealized Appreciation (NUA) allows the growth on company stock inside a 401(k) to be taxed at long-term capital gains rates — not ordinary income rates. The difference matters across a wide range of income levels, not just the top bracket.
• Rolling your 401(k) to an IRA before taking advantage of NUA permanently eliminates the strategy. It cannot be undone.
• The people who process your departure — rollover specialists, HR, your CPA — aren’t looking for this. It requires a proactive conversation before you act.
• NUA affects more than your income tax bill. It touches Medicare premiums, Social Security taxation, estate planning, and investment concentration.
• NUA sits at the intersection of tax, investment, and estate planning. The window is narrow, the coordination matters, and the sequence is everything.

You spent decades at your company. You accumulated stock along the way — through employer matches, profit sharing, maybe an ESOP. You watched it grow. You knew, at some level, that it represented something real.

Then came the transition. A new role, a retirement, a departure that had been building for months. HR walked you through your options. A rollover specialist called and explained the process. You did what made sense: you moved everything to an IRA, kept it tax-deferred, and got on with the next chapter.

It felt like the responsible move. It probably was, for most of your account. But for the company stock? That phone call may have been one of the most expensive financial decisions of your life — and nobody in the room knew to flag it.

What is NUA?

There’s a provision in the tax code called Net Unrealized Appreciation, or NUA. It’s established under IRC §402, it’s been around for decades, and it’s rarely part of the rollover conversation.

NUA is the difference between what your employer originally paid for company stock when it was contributed to your retirement plan — the cost basis — and what that stock is worth today. Under standard IRA rollover rules, every dollar that eventually comes out of your account is taxed as ordinary income. The growth on your company stock — every dollar of appreciation that accumulated over years or decades — gets taxed the same way as your paycheck.

NUA changes that. It allows the appreciation on employer stock to be taxed at long-term capital gains rates instead — rates that are lower than ordinary income rates across every tax bracket. Depending on where you fall, that spread ranges from a few percentage points to more than twenty. On a large, appreciated position, the difference is rarely trivial.

Who does NUA apply to?

NUA is available to anyone who holds employer stock inside a qualified retirement plan — a 401(k), profit-sharing plan, or ESOP. It’s most relevant when several conditions converge:

• You have company stock that has appreciated significantly relative to its original cost basis.
• You have a qualifying triggering event — more on that below.
• You have liquidity to cover the ordinary income tax due on the cost basis at the time of distribution.
• The spread between your ordinary income rate and your long-term capital gains rate is meaningful enough to justify the trade-offs.

It’s worth saying directly: NUA is not exclusively a strategy for people in the highest tax brackets. The long-term capital gains rate is lower than the ordinary income rate at every level of taxable income. Someone in the 24% bracket paying 15% in long-term capital gains tax is still capturing a 9-percentage-point difference on every dollar of NUA — and that adds up quickly on a large position.

In our experience, the people who have the most to gain are those who have been at a publicly traded company for a significant period of time, accumulating company stock through employer contributions, and who have never had the NUA conversation with their advisor.

If you have company stock in a retirement plan and a job transition or retirement anywhere on the horizon, this conversation is worth having before anything moves. Schedule a complimentary intro call with a Brighton Jones advisor.

Pre-tax dollars vs. after-tax dollars — why this distinction matters

Here’s the core issue with rolling company stock into an IRA that most people don’t fully appreciate: an IRA rollover doesn’t protect your money from taxes. It defers them. Every dollar inside that IRA — including every dollar of appreciation on your company stock — will eventually be taxed as ordinary income when it comes out. That’s not a problem you’ve solved. It’s a problem you’ve postponed.

And at some point, the postponement ends whether you want it to or not. Once you reach your required minimum distribution (RMD) age, the IRS requires you to begin taking withdrawals from your IRA on a set schedule — taxed as ordinary income, regardless of whether you need the money or whether it’s a good year to take a large distribution. The bigger your IRA, the larger those mandatory withdrawals, and the more ordinary income you’re forced to recognize every year in retirement.

NUA takes a different path. By distributing the company stock into a taxable account instead of rolling it to an IRA, you’re converting what would have been pre-tax IRA dollars into after-tax dollars — taxed now on the cost basis at ordinary income rates, but with the appreciation subject to long-term capital gains rates, which are lower at every bracket level. The stock in the taxable account is not subject to RMDs. You control when you sell it, and you control when you recognize the gain.

The choice comes down to this: an IRA rollover gives you more dollars to be taxed on later, on the government’s schedule. NUA gives you fewer pre-tax dollars and more after-tax dollars, on your schedule. For people with significant company stock and a long retirement ahead, that distinction can matter as much as the rate differential itself.

Why the phone call goes the wrong way; why the opportunity gets missed

The rollover specialist isn’t doing anything wrong. They’re doing exactly what they were hired to do: process the distribution efficiently and move the assets. They’re not your tax strategist. They’re not looking at your estate plan. They don’t know your bracket, your concentration risk tolerance, or what you want to leave your heirs.

Your CPA files your return. They’ll see the 1099-R after the fact — after the rollover is complete, after the window has closed. NUA isn’t something you can elect retroactively.

Your financial advisor manages your portfolio. But if they’re not connected to your tax picture, they may not know what’s sitting inside your 401(k) or what your cost basis is.

Each of these professionals is competent. None of them are looking at the full picture at the moment the decision gets made. And the moment it gets made is the only moment that matters — because once that stock is in an IRA, the NUA opportunity is gone. Permanently. There is no correction. There is no do-over.

What has to be true for NUA to work

A qualifying triggering event

The IRS doesn’t allow you to use NUA at will. You need to have separated from service, reached age 59½, become disabled, or died. The most common trigger is leaving your employer — which is exactly the moment most people are also fielding a call from a rollover specialist.

A lump-sum distribution

You must distribute the entire vested balance of all accounts with that employer in a single tax year. You can’t cherry-pick just the appreciated stock. The non-company-stock portion — mutual funds, money market, everything else — can and typically should be rolled to an IRA. But the whole plan has to move in the same tax year.

Meaningful appreciation relative to cost basis

Cost basis in this context is what your employer actually paid for the stock when it was contributed to your plan — not what it’s worth today. The greater the spread between that original purchase price and today’s value, the more compelling NUA becomes.

Liquidity to cover the distribution-year tax bill

You owe ordinary income tax on the cost basis in the year of distribution — whether or not you sell a single share. You need cash to cover that bill without being forced to immediately sell the stock you just distributed.

What If I Roll My 401(k) to an IRA First?

The NUA opportunity is gone. Permanently. Once company stock enters an IRA, it loses its NUA identity. Every dollar — including all of the appreciation — will eventually be taxed as ordinary income when withdrawn. There is no way to recover the NUA treatment after the rollover is complete. This is why the sequence of decisions matters more than the decisions themselves.

When does NUA make sense?

NUA tends to make sense when:

• The appreciation relative to the cost basis is substantial.
• There is a meaningful spread between your ordinary income rate and your long-term capital gains rate, which exists at every bracket level.
• You have liquid assets to cover the ordinary income tax on the cost basis at distribution.
• You have the risk tolerance to hold a concentrated position for a period of time after distribution.
• An NUA election may give you more flexibility when it comes to estate planning — especially considering the 10-year inherited IRA distribution rule.

NUA may not be the right move when:

• The cost basis is high relative to current value — meaning there isn’t much appreciation to convert.
• The rate differential between your ordinary income rate and long-term capital gains rate is too small to justify the trade-offs.
• You need to sell the stock quickly after distribution for diversification or cash flow reasons.
• Your state doesn’t conform to the federal NUA rules and would tax the appreciation as ordinary income.
• You’re many years from a triggering event and have significant time for tax-deferred growth ahead.

What are the risks?

NUA is a real strategy with real trade-offs. Each of these deserves direct consideration before you act:

• Concentration risk. After distribution, you’re holding — potentially for years — a large position in a single stock. If the company underperforms significantly, the tax savings don’t offset a serious decline in value.
• Ordinary income tax bill up front. You owe income tax on the cost basis in the year of distribution, regardless of whether you sell any shares. If the stock subsequently drops, you’ve paid tax on a cost basis that now exceeds the stock’s value.
• Timing risk. Stock prices move. If the position falls sharply after distribution, the math that made NUA compelling at the time of decision looks very different in hindsight.
• State tax non-conformity. Not all states conform to the federal NUA rules. Some will tax the full appreciation as ordinary income regardless of how the federal distribution is structured.
• Once executed, the strategy cannot be undone. Errors — including an inadvertent partial IRA rollover before the in-kind distribution — can permanently forfeit the opportunity.
• Complexity at the plan level. Not all plans allow in-kind distribution of employer stock. Some plans have converted or transferred positions in ways that affect cost basis records. Confirming plan eligibility and obtaining accurate cost basis figures is a prerequisite, not an afterthought.

 

How NUA affects other parts of your financial picture

NUA doesn’t exist in isolation. A distribution year with significant ordinary income — even just on the cost basis — ripples into several other areas that are easy to overlook:

Medicare premiums (IRMAA)

Medicare Part B and Part D premiums are determined by your Modified Adjusted Gross Income (MAGI) from two years prior. A large distribution year can push your MAGI above IRMAA thresholds, triggering premium surcharges that persist for years after the distribution. For someone retiring at 63, an NUA distribution could affect Medicare costs starting at 65 — a connection that rarely gets made when tax and investment planning happen in separate conversations.

Social Security taxation

The portion of Social Security benefits subject to income tax is determined by your combined income in a given year. Higher ordinary income in the distribution year can cause up to 85% of your Social Security benefits to become taxable. If you’re receiving Social Security in the same year as the NUA distribution, this effect is immediate.

Net Investment Income Tax (NIIT)

The 3.8% NIIT applies to net investment income — including the NUA gain — for taxpayers above certain income thresholds ($200,000 single / $250,000 married filing jointly). For taxpayers below those thresholds, NIIT does not apply, which makes the NUA strategy even more favorable at lower income levels.

Investment strategy and concentration

Distributing a large block of company stock into a taxable account creates an immediate concentration decision. How long do you hold it? At what point does the tax tail wag the investment dog? These questions need to be answered before distribution, not after.

Questions about how an NUA election could impact your ability to leave a more tax-efficient inheritance or legacy? Book an intro call with a Brighton Jones advisor.

How does NUA affect my estate plan?

NUA stock held in a taxable account after distribution opens up estate planning options that aren’t available with IRA assets. Here are three worth understanding:

The 10-year inherited IRA rule

Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries who inherit an IRA must withdraw the entire balance within 10 years of the original owner’s death — and pay ordinary income tax on every dollar. A large inherited IRA can push a beneficiary into a higher tax bracket during those withdrawal years. NUA stock held in a taxable account doesn’t carry this same mandatory distribution burden, giving heirs more flexibility over when and how they access the funds.

Gifting shares to charity or a donor-advised fund

If you donate appreciated NUA stock directly to a qualifying charity or donor-advised fund (DAF), you may avoid paying capital gains tax on the appreciation entirely. If you itemize deductions on your tax return, you may also be able to deduct the full fair market value of the donated shares — not just your cost basis. No capital gains are recognized, and a deduction for the full current value delivers two benefits from a single transaction.  This benefit is most meaningful for taxpayers who itemize; those who take the standard deduction won’t capture the deduction side.

Gifting shares to family members

You can also gift NUA stock to family members during your lifetime. If the recipient is in a lower tax bracket, they may pay a lower capital gains rate when they eventually sell — shifting the tax burden to someone with a smaller bill. The 2026 annual gift tax exclusion is $19,000 per recipient per donor; gifts above that threshold count against your lifetime exemption. Gifted shares carry over your original cost basis — unlike inherited stock — so the NUA gain travels with the shares to the recipient. This is different from inherited NUA stock, where only the post-distribution appreciation may be eligible for a step-up.

How to find out if NUA is available to you

Before assuming NUA is an option, three things need to be confirmed with your plan administrator:

• Does the plan hold employer stock that was contributed by the employer, not purchased by you with after-tax dollars?
• Does the plan allow in-kind distribution of employer stock directly to a taxable brokerage account?
• What is the plan’s recorded cost basis for the employer stock? This figure — the original purchase price, not the current value — is the foundation of the entire NUA calculation.

Getting accurate cost basis records can take time. Plan recordkeepers may need to go back decades. This is not a conversation to start the week before your last day.

It’s also worth confirming your state’s tax treatment of NUA distributions before proceeding. A conversation with a tax professional who understands both federal and state implications is a prerequisite, not an optional step.

One practical note: if your employer stock was acquired through an ESOP, the cost basis rules can be more complex. ESOP allocations have their own accounting treatment, and plan records should be reviewed carefully before any distribution decision is made.

The conversation that should have happened first

In our experience, the people who benefit most from NUA aren’t the ones who discovered it themselves. They’re the ones who had a team that was already thinking about their departure — before HR sent the paperwork, before the rollover specialist called, before anything moved.

That team isn’t a CPA plus a financial advisor plus an estate attorney who occasionally compare notes. It’s an integrated group — tax, investments, estate — working from the same information, in the same conversation, before the triggering event arrives.

NUA touches income tax, Medicare premiums, Social Security, investment concentration, and estate planning. None of those disciplines can optimize the decision alone. All of them need to be in the room before the distribution happens.

The NUA question isn’t complicated once it’s on the table. What’s complicated is making sure it gets on the table at the right moment — before the default answer becomes the permanent answer.

Frequently Asked Questions

What happens if I already rolled my 401(k) to an IRA?

The NUA opportunity is gone permanently. Once company stock enters an IRA, it loses its NUA identity and will be taxed as ordinary income on withdrawal. This is why the sequence of decisions matters — NUA has to be evaluated before the distribution, not after.

Can I roll part of my 401(k) to an IRA and still use NUA?

The non-company-stock assets can and typically should be rolled to an IRA. The lump-sum distribution requirement means the entire plan balance must be distributed in a single tax year — but that doesn’t mean all of it goes to a taxable account. The structure of the distribution matters significantly, and execution should be coordinated carefully.

Does NUA only make sense for people in the highest tax bracket?

No. Long-term capital gains rates are lower than ordinary income rates at every bracket level. Someone in the 24% ordinary income bracket paying 15% in long-term capital gains tax still captures a meaningful spread on every dollar of NUA. The key variables are the size of the position, the degree of appreciation, and the full financial picture.

What happens to NUA stock when it’s inherited?

This is more nuanced than it might seem. If you’re evaluating inherited NUA stock, the key question is how much appreciation occurred before the stock left the qualified plan versus after it was distributed into the taxable account. Only the post-distribution appreciation is eligible for the normal step-up in basis at death. The NUA gain itself — the appreciation that built up inside the plan before distribution — does not receive a step-up and remains taxable to the heir as a long-term capital gain. Understanding this distinction matters for both the original NUA election and any estate planning decisions that follow.

How does NUA interact with my Medicare premiums?

The ordinary income recognized on the cost basis in the distribution year increases your MAGI, which can trigger IRMAA surcharges on Medicare Part B and Part D premiums two years later. This is a commonly missed downstream effect — and one that integrated planning can anticipate and, in some cases, mitigate through distribution timing.

About the Author: Mitchell Kotheimer, CFP®, is a Lead Advisor at Brighton Jones. He helps high-income professionals and families design tax-efficient investment strategies and retirement plans aligned with their principles and long-term goals.

Disclosure: This content is for informational and educational purposes only and should not be construed as individualized advice. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. The examples and scenarios presented are hypothetical and for illustrative purposes only; they do not represent actual client results or guarantee similar outcomes. Tax laws are complex and subject to change. For individualized advice tailored to your specific circumstances, please consult with your adviser.