net unrealized appreciation (NUA) on employer stock

In short

A friend of mine spent thirty years at one company and ended up with a pile of its stock inside his 401(k). If you are holding company shares in a plan like his, there is a special tax path worth knowing about before you move any money. The rule is called net unrealized appreciation, or NUA. It lets a worker take the shares out in kind, which means as actual stock and not as cash, and pay ordinary income tax only on what the shares originally cost. The growth on top of that cost can be taxed later at long term capital gains rates instead. The catch is that the plan generally requires the whole account to be paid out in a single tax year, and a rollover of the stock to an IRA ends the benefit. Talk with a tax professional and read your plan's own distribution rules before you sign anything.

The whole of it

What it is

I once watched a retired machinist hold up a brokerage statement and say he had no idea why his tax bill was so strange. He had pulled his employer stock out of his 401(k), and the tax rules had treated the stock in two separate pieces. That is exactly what NUA is about.

The cost basis is what the plan paid for the shares when they went into your account. The net unrealized appreciation is the growth since then. Say the plan paid $20,000 for shares that are now worth $90,000. The cost basis is $20,000. The NUA is $70,000, because $90,000 minus $20,000 is $70,000.

Normally, money that leaves a traditional 401(k) is taxed as ordinary income, at the same rates as a paycheck. NUA treatment splits that in two. The cost basis is taxed as ordinary income in the year of the distribution. The growth gets a different path, and that path is the whole reason people ask about it.

How it works

If you are thinking about this, picture the sequence the way a plan would see it. First, the worker has a triggering event. The Internal Revenue Code lists these: leaving the employer, reaching age the current figure, which the official source publishes each year, becoming disabled, or death. Second, the plan pays out the entire balance of the account within one calendar year. That is the lump sum rule, and the plan has to follow it for the special treatment to apply. Third, the employer stock goes out as shares into an ordinary taxable brokerage account, and the rest of the account can be rolled to an IRA or paid in cash.

Now the taxes. The cost basis of the shares is ordinary income in the year they come out. If the worker is younger than the current figure, which the official source publishes each year, the extra 10 for 2025 (source, checked 9/27/2026) early withdrawal tax may also apply to that basis, unless an exception fits. The NUA is not taxed when the shares leave the plan. It is taxed when the worker sells them, and the law treats that part as long term capital gain no matter how briefly the shares were held after the distribution.

Any growth after the shares leave the plan is a separate matter. If the worker holds them for more than a year after distribution, the added growth is long term too. If the worker sells sooner, the added growth is short term and taxed as ordinary income.

One more point, and it matters. Money rolled into an IRA loses this treatment entirely. Once stock goes into an IRA, every dollar that comes out later is taxed as ordinary income. So the stock must go to a taxable account to keep the NUA benefit.

The numbers, and where to find yours

You have probably never seen your cost basis on a regular statement, and that is fine. It is the number that decides this whole thing, so it is worth hunting down. The plan recordkeeper, the company that runs the 401(k) for your employer, can tell you the average cost basis of the employer shares in your account. Ask for it in writing.

The tax law also sets several figures that change over time. The long term capital gains rate brackets are published each year by the Internal Revenue Service, and the current top rates are the current figure, which the official source publishes each year. The age for penalty free withdrawals and the early withdrawal tax rate are set by law, and the plan's own paperwork will say whether an exception applies. There is also a surtax on investment income for higher earners, called the net investment income tax, at the current figure, which the official source publishes each year above a threshold of the current figure, which the official source publishes each year. Whether NUA gain is hit by that surtax is a question for a tax professional, because the answer depends on the details of your return.

You will also receive Form 1099-R from the plan the year the shares come out. It reports the distribution. IRS Publication 575, Pension and Annuity Income, explains NUA, and the Internal Revenue Code section that governs it is section 402(e)(4). Those are the primary sources to read.

A worked example

Dale worked at a regional hardware distributor for twenty six years. When he retired at 61, his 401(k) held $400,000 in total. Of that, $150,000 was company stock. The plan's records showed that the shares had a cost basis of $30,000.

Dale first found his NUA. The shares were worth $150,000 and the cost basis was $30,000. So $150,000 minus $30,000 is $120,000 of NUA.

He then wanted to compare two paths. On the first path, he rolled everything to an IRA, stock included. Every dollar he later withdrew would be ordinary income. Take $150,000 of stock withdrawn over time, and all $150,000 gets taxed at his ordinary rates, whatever those turn out to be.

On the second path, he used NUA treatment. In the year of the distribution, he reported $30,000 of ordinary income, the cost basis. He rolled the other $250,000 of the account, which was not company stock, into an IRA. That is $400,000 minus $150,000, or $250,000. Later, when he sold the shares for $150,000, he paid long term capital gains tax on the $120,000 of NUA, and nothing more if the shares had not moved in price since the day they came out.

Say Dale's ordinary rate on that slice of income would have been 22 percent, and the long term gains rate on his gain is 15 percent. On the first path, 22 percent of $150,000 is $33,000 in tax. On the second path, 22 percent of $30,000 is $6,600, and 15 percent of $120,000 is $18,000, so the total is $24,600. The difference is $33,000 minus $24,600, which is $8,400. Those rates are only Dale's assumptions for this story. Your rates will differ, so run your own figures.

Where it goes wrong

I have heard more than one retiree say, I did not know the clock was ticking. That is how most NUA trouble starts. The lump sum rule is strict. If the plan pays out only part of the account in one year, and the rest the next, the special treatment can be lost. The borrower of this rule is nobody; it simply applies, and the plan must follow it.

Another trap is the rollover. A worker who sends the shares to an IRA by habit gives up the benefit, and it cannot be undone. The worker should confirm with the plan that the stock will be sent in kind to a taxable account.

A third problem is concentration. Holding a large share of your savings in one company is a risk of its own, and the tax rule does not make that risk smaller. This guide does not say whether to keep or sell any stock. It only explains how the tax treatment works.

The cost basis can also be tricky. Some plans track it poorly, and a wrong figure means a wrong tax bill. Get it in writing. Also, the NUA is not taxed when the stock comes out, but the cost basis is, so a worker should have cash set aside for that tax. And if the stock has fallen in value since it went into the plan, there may be no NUA at all, which makes the whole exercise pointless.

Last, the rule has exceptions and limits that depend on the plan and the person. Pay attention to what the plan documents say. Read them slowly.

Questions to answer before you leave this page

Do you know the cost basis of your employer shares, and have you asked your plan recordkeeper for it in writing? Is the NUA large enough, compared with the cost basis, that the split treatment could matter for your tax bill? Has a triggering event happened, such as leaving the job or reaching the qualifying age, that lets the plan pay out the account? Can the plan pay out the entire balance in a single calendar year, and has it confirmed that in writing? Will the shares be sent in kind to a taxable brokerage account, and not rolled to an IRA by mistake? Have you set aside cash to cover the ordinary income tax on the cost basis, and the early withdrawal tax if it applies? Have you read IRS Publication 575 and the plan's own distribution notice? And have you talked with a tax professional who can run your real numbers before any shares move?