What Is Net Unrealized Appreciation? The 401(k) Tax Strategy for Company Stock

How Does NUA Work and Who Qualifies?

When you leave your employer, you normally roll your 401(k) to an IRA. All future withdrawals are taxed as ordinary income — potentially at 22-37%.

With NUA, you distribute company stock in-kind (not cash) to a taxable brokerage account. You pay ordinary income tax only on the original cost basis of the shares — not the current market value. The appreciation (NUA) is taxed at long-term capital gains rates (0%, 15%, or 20%) when you eventually sell.

Qualification requires a 'triggering event': separation from service, reaching 59.5, disability, or death. You must distribute your entire 401(k) balance in a single tax year (the lump-sum distribution rule). Non-stock assets can be rolled to an IRA; only the company stock needs to be distributed in-kind.

When Is NUA Worth It Versus a Standard Rollover?

NUA makes sense when:

1. The stock has significant appreciation (high NUA relative to cost basis). If you bought company stock at $20/share through your 401(k) and it's now worth $100, the NUA is $80/share.

2. Your ordinary income rate is meaningfully higher than your capital gains rate. At 22% ordinary vs. 15% capital gains, NUA saves 7% on every dollar of appreciation.

3. You plan to hold the stock for more than 1 year after distribution (to maintain long-term capital gains treatment on additional appreciation beyond the NUA).

NUA is less attractive if: the stock has minimal appreciation, you're in a low tax bracket where ordinary and capital gains rates are similar, or you want to diversify immediately (NUA requires holding concentrated stock).

What Are the Risks of NUA?

Concentration risk: NUA requires holding company stock rather than diversifying. If the stock declines between distribution and sale, you could lose more than the tax savings.

Timing: The lump-sum distribution must occur in one calendar year. Missing this window can disqualify the NUA treatment.

Complexity: Proper execution requires coordination between your 401(k) administrator, brokerage, and tax preparer. Mistakes are difficult to reverse.

The analysis engine models the tax savings from NUA against the concentration risk, showing the breakeven point where diversification losses would exceed tax savings.

Want to See If NUA Saves You Money?

The analysis at myaifinancialplan.com models company stock distributions with NUA treatment versus standard rollovers, showing the tax impact specific to your cost basis, current value, and tax bracket. Start free at myaifinancialplan.com.