Company Stock in Your 401(k): The NUA Strategy That Could Save Thousands

Why Rolling Company Stock to an IRA Is Often the Wrong Move

When workers leave a company or retire, the default advice is to roll the entire 401(k) into an IRA. For most assets, that is sensible. But company stock is different, and treating it like everything else can cost you a substantial amount in unnecessary taxes. Here is why. Inside a traditional IRA, every dollar you eventually withdraw is taxed as ordinary income - at rates as high as 37% in 2026. That applies to every dollar, whether it came from growth, dividends, or the original contribution. Once company stock lands in an IRA, its entire future value is locked into ordinary income treatment. But if you take the company stock as a lump-sum distribution from the plan instead of rolling it, the tax rules change. Only the cost basis of the stock - what the plan originally paid for it - is taxed as ordinary income at distribution. Everything above that basis, the Net Unrealized Appreciation, gets long-term capital gains treatment when you eventually sell. And long-term capital gains rates top out at 20%, compared to 37% for ordinary income. On a concentrated position with a low basis, the savings are dramatic.

How NUA Works: The Four Requirements

NUA treatment is available under IRC Section 402(e)(4), but you must meet specific requirements to qualify. Miss any one of them and the ordinary-rollover rules apply. First, the distribution must be a lump-sum distribution. This means the entire account balance from all plans of the same type (all 401(k) plans, for example) with that employer must be distributed in a single tax year. You cannot take out just the stock and leave the rest. Second, the distribution must be triggered by a qualifying event: separation from service (leaving or retiring), reaching age 59.5, disability, or death. Third, the stock must be employer securities - actual shares of the company that sponsored the plan. Mutual funds or index funds that happen to invest in your company do not qualify. The shares must be the employer's own securities held in the plan. Fourth, you must take an actual distribution of the shares, not cash. The stock is distributed in-kind, meaning the actual shares are transferred to a taxable brokerage account. Once you meet these requirements, you pay ordinary income tax on the plan's cost basis at the time of distribution. The NUA - the appreciation above that basis - is not taxed until you sell the shares. When you do sell, that NUA is taxed at long-term capital gains rates regardless of how long you hold the shares after distribution. Any additional growth after the distribution date is taxed at the normal short- or long-term capital gains rate depending on your holding period from that point.

The Decision Framework: NUA vs Rollover

NUA is not always the right choice. The strategy has trade-offs that require careful analysis before you act. The primary factor is the ratio of cost basis to current value. A low basis relative to current value means a larger NUA benefit. A stock position worth $300,000 with a $30,000 basis (10% basis ratio) produces a large NUA advantage. A position worth $300,000 with a $240,000 basis (80% basis ratio) produces very little advantage since most of the value is already subject to ordinary income tax at distribution. The second factor is your tax bracket at distribution versus expected future bracket. If you are in a high bracket now and expect a lower bracket in retirement, rolling to an IRA and drawing down later may be more efficient. If you expect future brackets to rise - due to RMDs piling on top of Social Security - the NUA strategy locks in capital gains rates today. The third factor is the NUA stock's place in your overall portfolio. Taking a lump-sum distribution puts a concentrated stock position in your taxable account. You may need to hold that stock for some time to control when you recognize the capital gain. During that holding period, you carry single-stock concentration risk. Diversifying immediately means realizing the NUA gain all at once. Other factors to evaluate: state income taxes on the ordinary income portion at distribution, the 3.8% Net Investment Income Tax that applies to NUA gains for higher earners, and the loss of continued tax-deferred growth on the portion you take out of the plan.

• Calculate the cost basis ratio: basis divided by current value. Under 30% is a strong NUA candidate.
• Confirm the distribution qualifies as a lump-sum triggering event (retirement, separation, age 59.5)
• Check your state's tax treatment of the ordinary income portion at distribution
• Model the alternative: rolling to IRA and withdrawing at future ordinary income rates
• Account for the 3.8% Net Investment Income Tax on capital gains if your income exceeds $200,000 single or $250,000 married
• Plan for concentration risk during the period you hold the NUA stock before selling

NUA and the Tax Bracket Interaction

One of the clearest advantages of NUA is that capital gains rates are capped at 20% for most investors, and the 0% capital gains bracket applies to taxable income up to $48,350 for single filers and $96,700 for married filers in 2026. If you retire and your income drops substantially, you might be able to sell some or all of the NUA stock in years when your long-term capital gains rate is 0% or 15%. Compare that to an IRA withdrawal, which is always taxed at ordinary income rates regardless of how long the underlying investments were held. A retiree in the 22% bracket pays 22 cents on every dollar of IRA withdrawal. The same retiree might pay 0% or 15% on the NUA gain from the distributed stock. Timing the sale of the distributed stock also gives you control that an IRA does not. With an IRA, Required Minimum Distributions start at age 73 and force increasing withdrawals on the government's schedule. NUA stock in a taxable account has no RMDs. You can hold it, sell it gradually, or leave it to heirs who receive a stepped-up basis on any additional appreciation that occurred after you took the distribution.

Other Income Sources During the Holding Period

After a lump-sum NUA distribution, you may have a significant portion of your wealth concentrated in a single stock while you wait for the optimal time to sell. During that period, you still need income. This is where having multiple income sources matters. Roth IRA withdrawals are tax-free and do not affect your capital gains bracket. A Roth IRA that you have funded over the years can cover living expenses while you manage the NUA sale timing. Health Savings Account funds used for medical expenses are also tax-free and do not count toward your income for capital gains rate purposes. Some retirees use an Indexed Universal Life Insurance policy they funded during their working years as another option - policy loans are not counted as income for any tax purpose, keeping your taxable income low enough to maximize the 0% or 15% capital gains bracket while you sell the NUA stock in a controlled way. That is one specific use case among several. The broader point is that having tax-free income sources during the NUA stock-sale period protects the strategy's efficiency. The NUA strategy pairs well with a broader tax diversification plan that includes Roth accounts, taxable brokerage accounts with step-up planning, and other tax-free income sources. Any one of these tools is more valuable when it works alongside the others.