Company Stock in a 401(k): NUA Rules, Taxes, and Tradeoffs

Net Unrealized Appreciation (NUA) is a tax treatment that lets you pull employer stock out of your 401(k), pay ordinary income tax only on what the plan originally paid for the shares, and pay long-term capital gains rates on the growth when you eventually sell. For employees sitting on cheap shares that have run up in value, the savings can be real. The rules are unforgiving, though, and one wrong step wipes out the benefit entirely.

What NUA Actually Is

Net Unrealized Appreciation is the gap between the price your plan paid for your employer’s shares (the cost basis) and their market value on the day they leave the plan. Federal tax law lets you exclude that appreciation from gross income at the moment of distribution and defer it until you sell the shares from a regular brokerage account.¹ When the sale happens, the NUA portion is taxed at long-term capital gains rates regardless of how long you held the shares after distribution.

Long-term capital gains rates for 2026 are 0%, 15%, or 20% depending on taxable income.² The top ordinary income rate is 37%.³ That spread is the whole point of the strategy.

One boundary worth naming up front: NUA applies only to employer securities held in the plan. Mutual funds, bonds, and other investments in the same 401(k) don’t qualify, no matter how much they’ve appreciated.

The Requirements You Have to Meet

NUA treatment is not automatic. Miss any one of these requirements and the full market value of the stock is taxed as ordinary income.

A Qualifying Triggering Event

The distribution has to follow one of four events:⁴

Separation from service. Available only to common-law employees, not to self-employed individuals.¹
Reaching age 59½, whether or not you still work for the company.
Disability. Under the statute, this trigger applies only to self-employed participants.
Death. Beneficiaries can elect NUA on inherited employer stock.

A Lump-Sum Distribution

Your entire account balance has to leave the plan within a single tax year.⁴ “Entire balance” pulls in every qualified plan of the same type with that employer. A 401(k) and a profit-sharing plan at the same company both have to be emptied in the same calendar year. A partial distribution taken earlier can disqualify what’s left, so timing matters.

An In-Kind Transfer of the Shares

The employer stock has to move as actual shares into a taxable brokerage account. If the plan sells the stock and cuts you a check, NUA is gone. The rest of the plan doesn’t have to follow the stock, though. You can send the cash, mutual funds, and other holdings straight into an IRA and take only the employer shares in kind.¹ That split preserves NUA on the stock while keeping everything else tax-deferred.

How the Tax Bill Breaks Down

Once the distribution happens, the value of the employer stock separates into three layers, each taxed differently.

The cost basis is taxed as ordinary income in the year of distribution. If the plan paid $10 a share for 5,000 shares, $50,000 hits your return that year at your marginal rate.

The NUA itself, meaning the growth from cost basis to market value on the distribution date, is not taxed until you sell. When you do, it’s a long-term capital gain no matter how briefly you held the shares after leaving the plan.¹ Sell the next day if you want; the NUA still gets long-term treatment.

Any additional gain or loss after the distribution date follows normal capital gains rules. Hold more than a year and any further appreciation is long-term. Sell inside a year and the post-distribution gain is short-term, taxed at ordinary rates. The NUA slice keeps its long-term status either way.

A quick example. The plan bought stock for $20,000. On distribution day it’s worth $120,000. Six months later, you sell for $130,000. You owe ordinary income tax on the $20,000 basis in the year of the distribution. The $100,000 of NUA is a long-term capital gain when you sell. The extra $10,000 earned after distribution is a short-term capital gain because you held it under a year.

The 10% Penalty and the 3.8% Surtax

If you’re under 59½ when the distribution happens, the 10% early withdrawal penalty applies to the cost basis, because that amount is included in gross income. The NUA and any post-distribution appreciation are not subject to the 10% penalty at any age. If you separate from service during or after the year you turn 55, the cost basis can also escape the 10% penalty under the age-55 rule that applies to employer plan distributions.

The 3.8% Medicare surtax works in your favor on the NUA itself: NUA gain is not treated as net investment income. Post-distribution appreciation is different. That portion counts as investment income and can trigger the surtax if your modified adjusted gross income clears $200,000 single or $250,000 married filing jointly.

When NUA Is Worth It

The strategy pays off when the cost basis is low relative to current value. Shares the plan bought at $5 that now trade at $80 create a wide NUA spread, and the ordinary income tax on the $5 is trivial compared to the capital gains savings on the $75.

The math turns against you as the basis climbs. Take a plan that paid $400,000 for stock now worth $500,000. Electing NUA means paying ordinary income tax on $400,000 today just to get capital gains treatment on $100,000 of appreciation. Rolling everything into an IRA and deferring the whole balance is usually the better call.

Concentration risk deserves equal weight in the decision. Once the shares sit in a taxable account, selling them to build a diversified portfolio triggers capital gains tax, and that friction leaves plenty of people stuck holding an outsized position in a single employer. Enron employees learned what that can cost.

A few practical patterns:

Low cost basis, large NUA: the strategy tends to work.
High cost basis, small NUA: the up-front ordinary income tax usually outweighs the capital gains savings.
Younger participants still working: losing decades of tax-deferred compounding inside an IRA may cost more than the NUA saves, especially if your retirement bracket will be lower.
Company stock is most of your net worth: concentration risk alone may argue against NUA.

Why the Decision Is Irreversible

If you don’t meet every lump-sum requirement, or the numbers don’t favor NUA, the standard move is rolling the whole 401(k) into a traditional IRA, employer stock and all. Inside the IRA the full value stays tax-deferred, and withdrawals later are ordinary income.⁴

Rolling employer stock into an IRA permanently ends the NUA election for those shares. You cannot roll the stock over and then claim NUA later when you sell. The choice is made at distribution, and there’s no partial credit: a distribution that doesn’t qualify as a lump sum makes the full market value of the stock ordinary income in that year.

Reporting It on Your Return

Your plan administrator reports the distribution on Form 1099-R.⁵ Three boxes carry the NUA math:

Box 1, Gross Distribution: total value including the NUA.
Box 2a, Taxable Amount: gross distribution minus the NUA, which for a clean NUA election represents the cost basis taxable now as ordinary income.
Box 6, Net Unrealized Appreciation in Employer’s Securities: the NUA itself, the amount that becomes long-term capital gain when you sell.⁶

A blank Box 6 means the administrator either didn’t compute the NUA or treated the distribution as ineligible. If you believe you qualified, call the administrator before you file.

1
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
2
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
3
Internal Revenue Service. Federal Income Tax Rates and Brackets
4
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
5
Internal Revenue Service. Instructions for Forms 1099-R and 5498
6
Internal Revenue Service. Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.