Net Unrealized Appreciation (NUA): The 401(k) Company Stock Tax Strategy (2026)

Most employees roll their 401(k) into an IRA when they leave a job — and eventually pay ordinary income tax on every dollar they withdraw. If you have highly appreciated employer stock sitting in that 401(k), there's an IRS-sanctioned alternative that converts a large portion of that tax bill from ordinary income rates (up to 37%) to long-term capital gains rates (20% + 3.8% NIIT). The strategy is called NUA — Net Unrealized Appreciation — and it's one of the most underused tax tools for employees at tech companies with employer stock programs.

What is NUA?

NUA stands for the difference between what your employer stock cost inside your 401(k) — the shares' cost basis — and the stock's fair market value at the time you take a lump-sum distribution from the plan.¹

Under IRC § 402(e)(4), when you take a qualifying lump-sum distribution of employer stock in-kind (as actual shares, not cash), the tax treatment is split:

• Cost basis portion: Taxed as ordinary income in the year of distribution — just like a normal 401(k) withdrawal.
• NUA portion (the appreciation): Not taxed at distribution. When you eventually sell the shares, that NUA is taxed at long-term capital gains rates — regardless of how long you hold the shares after distribution. You can sell the same week and still get LTCG treatment on the NUA.
• Post-distribution appreciation: Any gain above the FMV at distribution is subject to normal holding period rules — short-term if you sell within 12 months of distribution, long-term if you wait.

The four triggering events

NUA is only available in connection with a lump-sum distribution, which requires:

1. Distributing the entire balance from ALL qualified plans of the same employer in a single tax year (not just the company stock portion).
2. The distribution must be triggered by one of four qualifying events:¹
   • Separation from service (leaving the employer — retirement, layoff, voluntary quit)
   • Reaching age 59½
   • Death (for beneficiaries)
   • Total and permanent disability (self-employed only)

Important: If you leave your employer but roll your 401(k) to an IRA first, you permanently lose the NUA opportunity on those shares. The strategy must be executed before any rollover.

The tax math: NUA vs. IRA rollover

2026 LTCG rates: 0% up to $49,450 (single) / $98,900 (MFJ); 15% up to $545,500 / $613,700; 20% above those thresholds. The 3.8% Net Investment Income Tax applies on investment income above $200,000 (single) / $250,000 (MFJ).²

At the highest income levels, the combined federal rate on NUA is 23.8% — vs. 37% ordinary income on an IRA withdrawal. That's a 13.2-percentage-point spread. On $1M of NUA, the difference is $132,000 in federal tax.

Worked example: FAANG employee with employer match

Scenario: You worked at a large tech company for 15 years. Your 401(k) holds $1.2M total. Of that, $400K is employer company stock with a cost basis of $40K (the shares were purchased via employer matching contributions over 15 years at much lower prices). The stock is now worth $400K.

In this example, NUA saves roughly $33K in federal tax on that $400K stock position. The larger the NUA relative to cost basis — and the higher your marginal income rate at withdrawal — the bigger the savings.

Who benefits most from NUA

NUA is worth modeling if all of the following are true:

• Your cost basis in the employer stock is low — ideally below 30% of current FMV. If the stock has barely appreciated, the ordinary income triggered at distribution may not be worth the LTCG savings on the small NUA.
• You are in or expect to be in a high tax bracket at retirement — the NUA strategy is less valuable if your IRA withdrawals will be taxed at 12–22%. It shines when you'd otherwise be withdrawing at 32–37%.
• You have a qualifying event available — leaving the employer (retirement, layoff), reaching 59½, or disability.
• You can absorb the ordinary income tax on the cost basis in the distribution year — you're paying taxes now (on the cost basis) to save later (on the NUA). You need cash or other assets to cover that bill.
• You have not already rolled the plan to an IRA — once rolled, NUA is gone.

Risks and limitations

Concentrated stock position

Taking employer stock as an in-kind distribution means you're leaving the plan with a concentrated single-stock position in your taxable account. The NUA tax savings are only realized if you eventually sell — but if you hold concentrated stock too long and the company's stock price falls significantly, you lose the appreciation you were planning to convert to LTCG. Many advisors pair NUA with a systematic sell schedule or a 10b5-1 plan to manage this concentration risk.

IRMAA and Medicare surcharges

The ordinary income from the cost basis portion of the NUA distribution counts toward your MAGI for IRMAA purposes. A large distribution in a single year can push you into a higher IRMAA tier two years later (Medicare uses a two-year lookback). For 2026, IRMAA surcharges begin when MAGI exceeds $106,000 (single) / $212,000 (MFJ), with six tiers reaching up to $509.60/month extra for Part B.³

State income tax

California taxes long-term capital gains as ordinary income — no preferential LTCG rate — at rates up to 13.3%. For California residents, the NUA benefit is purely federal; state tax is the same regardless of NUA strategy. New York taxes capital gains as ordinary income up to 10.9%. Washington state has its capital gains tax (7%–9.9% above $262K). Texas and Florida have no income tax.⁴

10% early withdrawal penalty

If you trigger the NUA distribution before age 59½ via separation from service (not disability or death), the cost basis portion of the distribution may be subject to a 10% early withdrawal penalty — the same penalty that applies to any early 401(k) withdrawal. This reduces the attractiveness of NUA before 59½ unless a penalty exception applies. An advisor can model whether the net benefit still exceeds the penalty cost.

NUA and inherited 401(k)s

NUA can also apply to beneficiaries who inherit a 401(k) containing employer stock. In that case, the triggering event is the plan participant's death. The beneficiary takes the lump-sum distribution in-kind, pays ordinary income on the cost basis, and then owes LTCG on the NUA when selling — no step-up in basis on the NUA amount (unlike assets inherited outside a retirement account). This is a nuanced area worth reviewing with an advisor.

How to evaluate and implement NUA

1. Identify your cost basis. Contact your 401(k) plan administrator and ask for the cost basis of your employer stock held in the plan. This is not always easy to obtain — some record-keepers track it easily; others require you to piece it together from historical statements.
2. Model the comparison. Build a side-by-side: ordinary income tax on the full balance at projected IRA withdrawal rate vs. ordinary income on cost basis now + LTCG on NUA later. Include IRMAA, state tax, and the 10% penalty if under 59½.
3. Time the distribution correctly. The distribution must happen in the same tax year as the triggering event. Leaving a job in December and taking the distribution in January of the next year uses the next year as the distribution year — which matters for your income picture.
4. Handle the non-stock portion separately. Roll the remaining 401(k) balance (bonds, mutual funds, other assets) directly to an IRA. Only the employer stock position goes out in-kind.
5. Have a sell plan ready. Decide in advance whether you'll sell the stock immediately after distribution (capture NUA at LTCG rates right away) or hold for additional appreciation. If the stock is subject to insider trading restrictions, you may need a 10b5-1 plan.