Net Unrealized Appreciation: The 401(k) Company Stock Move Most People Miss
Henry Supinski, ChFC® · 5 min read · August 2026
Most people leaving a company roll the entire 401(k) into an IRA and never think about it again. If part of that 401(k) is your employer's stock, and that stock has appreciated a lot, the rollover can quietly convert what could have been capital gains into ordinary income. The rule that prevents that is called net unrealized appreciation, and it only works if you know about it before the rollover, not after.
What NUA Actually Is
Net unrealized appreciation is the difference between what your employer stock cost inside the plan (its cost basis) and what it is worth today. Normally, everything that comes out of a 401(k) is taxed as ordinary income. The NUA rule creates an exception: if you take the company stock out of the plan in kind, meaning as actual shares moved to a taxable brokerage account rather than sold or rolled into an IRA, you pay ordinary income tax only on the cost basis. The appreciation is taxed at long-term capital gains rates when you eventually sell, no matter how long you held the shares inside the plan.
Why That Matters
The gap between ordinary income rates and long-term capital gains rates is large, often fifteen to twenty percentage points at the income levels where this decision comes up. On a stock position with a low basis and years of growth, that gap applied to the appreciation can be tens of thousands of dollars. Roll the shares into an IRA and every dollar, basis and growth alike, comes out as ordinary income when withdrawn. Take them out under NUA and only the basis is taxed that way.
The Rules That Have to Be Followed Exactly
NUA has strict mechanics, and missing any one of them forfeits the treatment. The distribution must follow a triggering event: separation from service, reaching 59 and a half, disability, or death. The entire plan balance must be distributed within a single tax year as a lump sum distribution; the stock goes to a taxable account and everything else can roll to an IRA, but it all has to leave the plan in the same year. And the shares themselves must move in kind. If the plan sells them and sends cash, the opportunity is gone. Most 401(k) providers will handle this correctly if you ask, but they will not volunteer it.
Who It Helps and Who It Does Not
NUA works best when the stock has a low cost basis relative to its current value, when the position is a meaningful share of the account, and when you would otherwise be withdrawing the money at high ordinary income rates. It works poorly when the basis is high, because you pay ordinary income tax on the basis immediately rather than deferring it. Someone with company stock that has barely moved is usually better off with a straightforward rollover. It is a calculation, not a rule of thumb, and it should be run before the paperwork is signed.
A Hypothetical Employee at Retirement
The numbers are invented; the mechanics are real. A 62-year-old retiring from a large employer has $1.2 million in her 401(k), of which $400,000 is company stock with a cost basis of $80,000. Path one: she rolls everything into an IRA. Over the following years, all $400,000 of stock value comes out as ordinary income when withdrawn. Path two: she uses NUA. She pays ordinary income tax on the $80,000 basis in the year of distribution, moves the shares to a brokerage account, and rolls the other $800,000 into an IRA. When she sells the shares, the $320,000 of appreciation is taxed at long-term capital gains rates. On that appreciation alone, the difference between the two paths can easily reach five figures. She also now holds $400,000 of a single stock in a taxable account, which is a concentration decision of its own.
The Trade-Offs Nobody Mentions
NUA is not free money. You pay tax on the basis now rather than later. If you are under 55 when you separate, the basis portion may also owe a 10% early withdrawal penalty. The stock sits in a taxable account, so it no longer grows tax-deferred, and you carry single-stock risk until you sell. And the NUA portion does not get a step-up in basis at your death the way ordinary appreciated stock does; your heirs inherit the built-in gain. Each of those is a real cost to weigh against the rate savings.
How We Approach It
For anyone retiring from an employer where the 401(k) holds company stock, we run the NUA comparison before any rollover paperwork is touched. That means pulling the basis from the plan, projecting the two tax paths against the rest of the retirement income plan, and deciding on purpose. This comes up often for retirees from SAP, Vanguard, and the pharmaceutical employers around Wilmington, where long tenures and stock in the plan are common. The rollover is easy to do and impossible to undo, which is exactly why the calculation comes first.
Questions We Hear
What is net unrealized appreciation?
NUA is the growth in employer stock held inside a 401(k) or similar plan, above what the shares cost when acquired. Under the NUA rules, that growth can be taxed as long-term capital gains rather than ordinary income if the shares are distributed in kind to a taxable account as part of a lump sum distribution after a triggering event.
Can I use NUA if I already rolled my 401(k) into an IRA?
No. Once company stock has been rolled into an IRA, the NUA treatment is gone. That is why the analysis has to happen before the rollover, not after.
Do I have to distribute my entire 401(k) to use NUA?
Yes, the entire plan balance must be distributed within one tax year. But only the company stock needs to go to a taxable account. The rest can be rolled into an IRA in the same year without losing the treatment.
Is NUA always better than a rollover?
No. It depends on the cost basis relative to the current value, your tax bracket, your age, and your comfort holding a concentrated position in a taxable account. Low basis and a large position favor NUA. High basis usually favors a normal rollover. Run the numbers before deciding.