How NUA works
Normally every dollar you withdraw from a 401(k) is taxed as ordinary income. The NUA rules carve out an exception for securities of your employer, or of its parent or subsidiary, held in a qualified plan. When those shares leave the plan in kind, as actual shares rather than cash, in a qualifying lump-sum distribution, the tax splits into three pieces.
The plan’s cost basis in the shares, roughly what the plan paid for them, is ordinary income in the year of distribution. The NUA, the gain between that basis and the shares’ value when they left the plan, is not taxed until you sell. When you do, it is long-term capital gain no matter how briefly you held the shares afterward. Any further rise after the distribution is long-term or short-term depending on how long you hold the shares from that date.
The plan reports the NUA in box 6 of Form 1099-R. You can elect to include it in income in the distribution year instead, but then the whole value is ordinary income and the capital gains treatment is lost.
Requirements for NUA treatment
The full NUA deferral needs a lump-sum distribution as the tax code defines it, with the employer shares landing somewhere other than an IRA. Without a qualifying lump sum, IRS Publication 575 limits the deferral to NUA from your own after-tax contributions, so shares bought with pre-tax or employer money are taxed like any other plan withdrawal, as ordinary income on their full value. Because reaching 59½ is a triggering event, you do not always have to leave the job first, if your plan allows an in-service payout of the whole balance.
- A triggering event: separation from service, reaching 59½, death, or disability if you are self-employed.
- Your entire balance from all of the employer’s plans of the same kind, such as all its profit-sharing plans, paid out within one tax year.
- A qualified plan under section 401(a) or 403(a), such as a 401(k), profit-sharing plan or ESOP. A 403(b), 457(b) or IRA does not qualify.
- The employer shares distributed in kind to a taxable account. Shares rolled into an IRA lose NUA treatment for good.
NUA vs. rolling the stock into an IRA
The alternative is an IRA rollover of everything, company shares included, with no tax now. NUA trades a tax bill today on the basis for capital gains rates, currently 0%, 15% or 20%, on the growth. The rollover keeps everything deferred but eventually taxes every dollar as ordinary income, including through required minimum distributions.
NUA has side effects too. The NUA portion is exempt from the 3.8% net investment income tax, though growth after distribution is not. Shares held in a taxable account face no RMDs, but their dividends are taxed each year. And a long-standing IRS revenue ruling, Rev. Rul. 75-125, treats unsold NUA as income in respect of a decedent, so heirs generally do not get a step-up in basis on that portion.
When NUA makes sense, and when it doesn’t
Three factors decide whether NUA beats a rollover. The first is the basis ratio: the lower the plan’s cost compared with the shares’ value, the more growth you shift to capital gains rates and the less ordinary tax you pay up front. The second is the gap between your ordinary rate in the distribution year and the capital gains rate you expect when you sell. The third is time: paying tax on the basis now gives up years of tax-deferred growth on that money, which matters more to a younger retiree with a long horizon. NUA also fits someone who plans to sell or diversify soon anyway, since the NUA is long-term gain even if you sell the day after distribution.
It need not be all or nothing. IRS Topic 412 lets you roll over all or part of a lump sum, so you can take some employer shares in kind and roll the others; if the plan lets you choose which, the lowest-basis shares gain the most from NUA. And do not let the tax break keep you in one stock. Holding a concentrated position for years just to postpone capital gains tax ties your plan to one company, and diversification is usually worth more than the deferral.
How to take an NUA distribution, step by step
The window usually opens when you leave the employer, and it can close quickly: rolling the whole account to an IRA before deciding ends NUA for those shares. Mistakes here are rarely reversible, so work through the steps below with the plan administrator, and confirm each instruction in writing, before any shares move. Because the NUA is measured at the shares’ price on the day they leave the plan, a volatile stock can change the numbers between request and delivery.
- Get the numbers: ask the plan for the cost basis of your employer shares and the NUA it would report.
- Check the timing: confirm your triggering event and that the full lump sum can be paid within one tax year, which matters near year-end.
- Split the payout: send the employer shares in kind to a taxable brokerage account, and roll other assets directly to an IRA in the same year.
- Cover the tax: a payout made up only of employer shares usually has no tax withheld, so plan estimated tax payments for the basis.
- Under 59½, expect the 10% additional tax on the basis unless an exception such as the rule of 55 applies. The NUA itself is exempt.
Illustrative numbers
Retiring at 60 in 2026 with $500,000 of company stock in a 401(k)
- Market value
- What the shares are worth on the day they leave the plan
- Cost basis
- The plan’s cost for the shares, taxed as ordinary income in the distribution year
Growth after the distribution date is taxed separately, as short- or long-term gain depending on how long you hold the shares.
Employer shares in the 401(k), market value$500,000
Plan’s cost basis in those shares$100,000
NUA (box 6 of Form 1099-R)$400,000
Tax at distribution: $100,000 × assumed 24% ordinary rate$24,000
Tax when sold: $400,000 × assumed 15% capital gains rate$60,000
NUA route total$84,000
Rollover route: $500,000 withdrawn later × assumed 24%$120,000
Under these assumptions the NUA route saves $36,000, before counting what the $24,000 paid early could have earned in an IRA. A higher basis, or a lower expected rate in retirement, narrows the gap, and a sale that large could push part of the gain into the 20% capital gains rate.
At a glance
Employer stock leaving a 401(k): NUA distribution vs. IRA rollover
| Feature | NUA distribution | Roll into an IRA |
|---|---|---|
| Tax in the distribution year | Ordinary income on the plan’s cost basis | None |
| Growth inside the plan | Long-term capital gains rates when sold | Ordinary income when withdrawn |
| Growth after distribution | Capital gains, short or long term by holding period | Ordinary income when withdrawn |
| 3.8% NIIT | Not on the NUA; applies to later growth | Not on IRA withdrawals |
| 10% early tax under 59½ | Only on the basis, and only without an exception | On withdrawals without an exception |
| Required minimum distributions | None on shares in a taxable account | Yes, from age 73 or 75 |
| At death | NUA portion generally gets no step-up | Heirs owe ordinary income tax on withdrawals |
Put it in your plan
See it in your own numbers
Definitions are general; your situation is not. MoneyWhatIf projects your income, taxes, accounts, and spending year by year, so you can see how ideas like Net Unrealized Appreciation play out in a plan built from your own numbers.
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NUA FAQs
Is NUA taxed as a long-term capital gain even if I sell right away?
Yes. The NUA portion is always treated as long-term capital gain, whatever your holding period after the distribution. Only growth after the shares leave the plan depends on how long you hold them: sell within a year of the distribution and that extra slice is a short-term gain taxed at ordinary rates.
Can I use NUA if I already rolled my 401(k) into an IRA?
No. Once the shares are in an IRA, NUA treatment is gone and every later withdrawal is ordinary income. The decision has to be made while the shares are still in the employer’s plan, which is why it is worth asking the plan for the shares’ cost basis before requesting any rollover after you leave a job.
Does NUA apply to RSUs or ESPP shares?
No. NUA covers employer securities held inside a qualified retirement plan, such as a 401(k), profit-sharing plan or ESOP. Shares from restricted stock units or an employee stock purchase plan sit in an ordinary brokerage account and follow their own tax rules, with basis generally set when the shares are delivered or bought.
How is an NUA distribution reported on my tax return?
The plan sends Form 1099-R showing the shares’ cost basis as the taxable amount and the NUA in box 6. You enter the whole distribution and its taxable part on the pension and annuity lines of Form 1040. Your basis in the shares is then the amount taxed at distribution, so when you sell, the gain up to the NUA is long-term capital gain and anything above it follows your holding period.