When people leave a job, the standard advice is typically to roll the old 401(k) into an IRA. But if your plan holds company stock, that reflexive move could erase a valuable tax break known as Net Unrealized Appreciation, or NUA.
Here’s how it works.
If you hold employer stock inside your 401(k), the plan tracks your cost basis (what you originally paid or were granted). Over time, that stock may have appreciated substantially. When you roll everything into an IRA, all future withdrawals—whether from that stock or anything else—are taxed as ordinary income.
NUA offers an alternative. Instead of rolling the employer stock into an IRA, you can transfer the shares in-kind to a taxable brokerage account at the time you retire or separate from service. You’ll pay ordinary income tax only on the cost basis at that time. The appreciation—the “NUA” portion—is deferred until you sell the stock, and then taxed at the lower long-term capital gains rate.
Here’s a simplified example:
You bought $50,000 of company stock in your 401(k) that’s now worth $200,000. If you roll it into an IRA, you’ll eventually pay ordinary income tax on the full $200,000. If you use NUA, you pay income tax only on $50,000 now, and the $150,000 gain is taxed later at capital gains rates—potentially saving tens of thousands in taxes.
NUA isn’t for everyone. It only applies to employer stock, requires specific timing rules, and can create concentration risk if you hold too much of one company. But for people with highly appreciated shares, it’s one of the rare cases where the default rollover may not be the best move.
If you’re preparing for a 401(k) rollover and have employer stock, it’s worth asking: could NUA treatment make sense for you?