Compare NUA distribution vs rollover for employer stock in 401(k).
NUA tax savings vs rollover
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Tax with NUA
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Tax with rollover
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Your breakdown
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Splitting employer stock into two tax buckets
Net Unrealized Appreciation is a once-in-a-career move written into the tax code under IRC Section 402(e)(4). If you hold company stock inside a 401(k) and that stock has grown far beyond what it cost the plan to buy, you can pull the shares out in kind rather than rolling them to an IRA. The trick is how the tax then splits. Your cost basis, the original purchase price the plan recorded, is taxed as ordinary income the moment you take the distribution. The appreciation on top of that basis, the NUA, escapes ordinary rates and is instead taxed at long-term capital gains rates whenever you eventually sell. The reported basis shows up in Box 6 of the Form 1099-R the plan sends you. This calculator compares that split against the ordinary path of rolling everything to an IRA.
A $500,000 position with a $100,000 basis
Run the defaults: stock worth $500,000 today, a cost basis of $100,000, a 32% ordinary rate, and a 20% long-term capital gains rate. The calculator taxes the basis at the ordinary rate and the appreciation at the gains rate, then compares the bill to a straight rollover taxed entirely at the ordinary rate as it comes out.
The strategy wins by $48,000 here because the bulk of the value, the $400,000 of appreciation, is taxed at 20% instead of 32%. The wider the gap between your ordinary rate and your capital gains rate, and the smaller your basis relative to the current value, the larger the prize.
Where the real-world rules are stricter than the math
This calculator isolates the tax split, which is the heart of the decision, but a few hard rules sit around it. NUA only works if you take a lump-sum distribution of the entire balance from the employer plan within a single tax year, triggered by a qualifying event such as separation from service, reaching age 59 and a half, disability, or death. Roll any of it to an IRA first and you forfeit the treatment permanently. The election is effectively irrevocable once you start. There is also a penalty wrinkle the model does not show: if you are under 59 and a half when you take the distribution, the 10% early-withdrawal penalty applies to the basis portion, the part taxed as ordinary income, not to the appreciation.
This is for someone retiring or leaving an employer who has watched company stock balloon inside their 401(k). It rarely fits if the basis is close to current value, since then there is little appreciation to shelter and you would be locking up a concentrated single-stock position for a thin tax benefit. The other quiet trade-off is diversification. Keeping a large slug of one company's stock to harvest the gains rate can leave you dangerously undiversified, and a 20% tax saving is cold comfort if the stock then drops 40%.
Is the NUA gain always long-term, even if I sell right away?
Yes for the NUA portion. The appreciation that existed inside the plan is automatically treated as a long-term capital gain when you sell the distributed shares, regardless of how briefly you hold them after the distribution. Any further gain that accrues after the distribution date follows normal holding-period rules, so it is short-term if you sell within a year of distribution and long-term after that.
Can I use NUA on only part of my company stock?
The qualifying distribution must empty the entire employer plan in one tax year, but you can apply NUA treatment selectively to specific lots of the employer stock and roll the rest of the account to an IRA. Many retirees cherry-pick the lowest-basis shares for NUA treatment, since those carry the most appreciation relative to basis and deliver the biggest rate arbitrage, and roll the higher-basis shares to defer the rest.