What Is Net Unrealized Appreciation? How NUA Works for Employer Stock in a 401(k)

Net Unrealized Appreciation (NUA) is the growth in your employer's stock while it sat inside your 401(k). If the shares leave the plan in a qualifying lump-sum distribution, you pay ordinary income tax on what the plan paid for them that year, and long-term capital gains tax on the growth only when you sell.

Rules and figures in this guide were checked against Internal Revenue Service (IRS) and California Franchise Tax Board (FTB) sources on October 20, 2026.

Why This Question Comes Up

You spent twenty or thirty years at one company, and a large slice of your 401(k) is company stock bought at prices that look quaint today. You know the position is too big for a retirement that depends on it. Every dollar that comes out of a traditional 401(k) or IRA is generally taxed as ordinary income, and the growth is most of the account. So the shares sit, and every earnings call feels a little more personal than it should.

NUA is a rule in the tax code that can move most of that growth to the lower long-term capital gains rate. It comes with strict rules and real trade-offs, and whether it fits depends on your facts, so a tax professional should review it before you act.

What Net Unrealized Appreciation Means

Two numbers matter. The first is your cost basis, what the plan paid for the shares over the years. Your plan administrator tracks it. The second is what the shares are worth on the day they leave the plan. The difference is the NUA.

If the plan bought shares for $20 each and they are worth $120 when they come out, the cost basis is $20 and the NUA is $100 per share.

NUA applies only to your employer's stock held inside a workplace retirement plan, such as a 401(k) or an Employee Stock Ownership Plan (ESOP), and only to the growth that happened while the stock was in the plan (IRS Publication 575 and Internal Revenue Code Section 402(e)(4)).

How NUA Compares With a Rollover

With a rollover, the whole account moves to an IRA, nothing is taxed that year, and the money keeps growing without tax until you take it out. Every dollar you withdraw later, including the stock's growth, is taxed as ordinary income at your rate that year.

With NUA, the shares move into a regular brokerage account, and the tax comes in three pieces.

When the shares leave the plan. You pay ordinary income tax on the cost basis. The NUA is not taxed yet, and the plan reports it in box 6 of your Form 1099-R (IRS Topic No. 412).

When you sell. The NUA is taxed as a long-term capital gain, even if you sell the day after the shares arrive (IRS Notice 98-24). For 2026 the federal rate on long-term gains is 0 percent up to $98,900 of taxable income for married couples filing jointly, 15 percent up to $613,700, and 20 percent above that (IRS Revenue Procedure 2025-32).

Growth after the shares leave the plan. Any gain above the NUA is taxed like any other stock you own, at the long-term rate if you held the shares more than a year after they left the plan, and at your ordinary rate if you held them a year or less.

Once the shares are in an IRA, NUA is no longer available, and later withdrawals follow the regular IRA rules (IRS Topic No. 412).

The Rules That Have to Line Up

Missing any one of these can cost you the whole benefit, and mistakes often happen at the paperwork stage.

One of four events has to come first. The payout has to follow leaving the employer, reaching age 59½, death, or, for a self-employed person, total and permanent disability (IRS Topic No. 412).

Everything has to come out in one tax year. You have to empty all of that employer's plans of the same type within a single tax year, including the money you plan to roll over (IRS Topic No. 412). The usual setup sends the shares to a brokerage account and everything else straight to an IRA, in the same calendar year. A partial withdrawal in an earlier year, after one of the four events, can disqualify you. Ask the plan administrator how long the process takes so it finishes inside the year.

The stock has to come out as shares. If the plan sells the shares and sends cash, or the shares go into an IRA, NUA is gone. Not every plan allows shares to come out, so ask early.

Check the plan's numbers. The plan sets the cost basis and the NUA, so confirm both before you rely on them. Ask whether the plan lets you choose which shares come out, since some plans track a separate cost for each purchase. Also ask how the plan handles the 20 percent tax withholding required on most payouts when the payout is in shares.

A Hypothetical Example With Round Numbers

This example is for illustration only. It does not describe any actual client or predict any result.

A married couple, both 62, retire from the same employer in the same year. Their 401(k) holds $1,000,000 of company stock with a cost basis of $150,000, so the NUA is $850,000. The account also holds $900,000 in other funds. Their other taxable income that year is $225,000, which puts them in the 24 percent federal bracket. For joint filers in 2026, that bracket runs from $211,400 to $403,550 (IRS Revenue Procedure 2025-32). The math uses federal tax only and assumes the stock price stays flat.

Rollover. Everything goes to an IRA. When the couple later withdraws the stock's $1,000,000, it is taxed as ordinary income. At 24 percent, the federal tax is $240,000. Required Minimum Distributions (RMDs) are the amounts the IRS requires you to withdraw each year starting in your 70s. If those or other large withdrawals push some of it into the 32 percent bracket, the tax moves toward $320,000.

NUA. The $900,000 of funds goes to an IRA and the shares go to a brokerage account, in the same calendar year. The $150,000 cost basis is taxed at 24 percent, which is $36,000. The couple sells the shares over a few years so the gain stays in the 15 percent range, which puts the tax on the $850,000 of NUA at $127,500. The total is $163,500.

In this example, that is $76,500 to $156,500 less federal tax on the same shares. The rollover has advantages these numbers leave out. It pays no tax today, the full $1,000,000 keeps growing without tax, and the shares can be sold inside the IRA right away with no tax, so the risk of holding one stock can be reduced on day one. The longer the money stays invested, the more that tax-free growth closes the gap. The NUA route also adds $150,000 of income in one year, which can raise Medicare premiums two years later through the Income-Related Monthly Adjustment Amount (IRMAA), a surcharge on higher incomes.

Who May Benefit and Who May Not

It may be worth a closer look if

• The shares are worth far more than the plan paid for them.
• You have left the employer or reached 59½, and you can empty the plans in one tax year.
• You expect to be in the 24 percent federal bracket or higher when you would otherwise take IRA withdrawals.
• You have cash to pay the tax on the cost basis without selling at a bad time.
• You plan to sell or give away the shares within a few years. Giving appreciated stock to charity can avoid the capital gain, though the deduction has its own holding rules, so ask first.

It may fit poorly if

• The shares are worth little more than the plan paid, which leaves little NUA to gain from.
• You are under 59½ and did not leave the job in or after the year you turned 55. The 10 percent early withdrawal tax can then apply to the cost basis, though never to the NUA itself (IRS Topic No. 558).
• You expect low income in retirement, since IRA withdrawals taxed at 12 or 22 percent can cost less than paying 24 percent on the cost basis now.
• You want the money invested for decades, where the rollover's tax-free growth adds up.
• You plan to leave the shares to your heirs. Inherited stock usually gets a fresh cost basis equal to its value at death, which erases the gain. That reset, called a step-up in basis, does not apply to the NUA, so your heirs would owe capital gains tax on it when they sell (Revenue Ruling 75-125).

The 3.8 Percent Tax and the Risk of One Stock

The Net Investment Income Tax (NIIT) is an extra 3.8 percent tax on investment income once your income, as the IRS measures it for this tax, passes $200,000 for single filers or $250,000 for married couples filing jointly. Those amounts do not rise with inflation (IRS, Questions and Answers on the Net Investment Income Tax). The NUA is exempt from it when you sell (Treasury Regulation Section 1.1411-8). Growth after the shares leave the plan, and dividends paid after that, are included.

Moving the shares does nothing to lower the risk of owning one company's stock. Once the stock is in your brokerage account, you hold the same position, now outside the tax shelter of the plan. If your paycheck, your plan, and your savings all depend on the same company, our guide to diversifying a concentrated stock position covers ways to reduce that exposure, and our equity compensation planning guide covers stock options and restricted stock units, which follow different rules.

The California Angle

California taxes all capital gains as ordinary income, with no lower rate (FTB, updated January 28, 2026). State rates run from 1 percent to 12.3 percent, plus 1 percent on taxable income above $1,000,000 (FTB 2025 tax rate schedules, the most recent published as of October 20, 2026). California generally follows the federal rules for lump-sum payouts (FTB, Schedule G-1 instructions), so for state tax, NUA changes the year you pay and the rate stays the same. That still gives you some control, since you choose the year you sell each block of shares.

Two more state details matter. If the federal 10 percent early withdrawal tax applies, California generally adds 2.5 percent of its own (FTB, Schedule G-1 instructions). And California generally does not tax retirement plan payouts to people who no longer live in the state, so if you may move, where you live in the year of the payout and in each year you sell is worth reviewing with your tax professional first.

This is part of the work we do in tax planning for households in Roseville, Granite Bay, Rocklin, and Folsom who hold a large amount of employer stock.

Where to Start

A rollover is a good answer for many people. If the first list above sounds like you, or you are unsure, start by asking your plan administrator three questions. Can the employer stock come out as shares? What is the cost basis of my shares? What is the estimated NUA? The payout cannot be redone once the shares move. If you would like a second set of eyes on the answers, we are glad to talk it through with you. Nothing about NUA has to be decided this week, and the decision is easier with the numbers in hand.

Related Reading

Sources

Figures checked October 20, 2026.

1. IRS, Topic No. 412, Lump-Sum Distributions, reviewed September 24, 2026: https://www.irs.gov/taxtopics/tc412
2. IRS, Publication 575 (2025), Pension and Annuity Income, section on distributions of employer securities: https://www.irs.gov/publications/p575
3. IRS, Notice 98-24, Net Unrealized Appreciation in Employer Securities: https://www.irs.gov/pub/irs-drop/not98-24.pdf
4. Internal Revenue Code Section 402(e)(4): https://www.law.cornell.edu/uscode/text/26/402
5. IRS, Revenue Procedure 2025-32, 2026 tax rate tables and section 4.03 on the maximum capital gains rate: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
6. IRS, Questions and Answers on the Net Investment Income Tax: https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
7. Treasury, 26 CFR 1.1411-8, Exception for distributions from qualified plans: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR4d4f1d482c2f558
8. IRS, Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs: https://www.irs.gov/taxtopics/tc558
9. IRS, Revenue Ruling 75-125, net unrealized appreciation and the basis of securities passing from a decedent
10. California Franchise Tax Board, Capital Gains and Losses, updated January 28, 2026: https://www.ftb.ca.gov/file/personal/income-types/capital-gains-and-losses.html
11. California Franchise Tax Board, 2025 Instructions for Schedule G-1, Tax on Lump-Sum Distributions: https://www.ftb.ca.gov/forms/2025/2025-540-g-1-instructions.html
12. California Franchise Tax Board, 2025 California Tax Rate Schedules: https://www.ftb.ca.gov/forms/2025/2025-540-tax-rate-schedules.pdf

Important Disclosures

Advisory services are offered through Up Capital Management, Inc., an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. This article is for general education only and is not individualized tax, legal, or investment advice. Whether Net Unrealized Appreciation fits depends on your facts, including your plan's cost basis and terms, your age, your income, your filing status, your state of residence, and the timing of payouts and sales. The lump-sum rules leave little room to fix a mistake, so consult a qualified tax professional before requesting a distribution. Holding employer stock outside a retirement plan carries the risk of owning one company, including the possible loss of principal, and diversification does not ensure a profit or protect against loss. The example is hypothetical, uses round numbers and simplified assumptions, leaves out state tax, deductions, and investment returns, is not based on any actual client, and does not predict any result. Federal figures reflect IRS Revenue Procedure 2025-32 and IRS guidance as of October 20, 2026, and California figures reflect Franchise Tax Board schedules for the 2025 tax year, the most recent published as of that date. Tax law can change, and no tax outcome is guaranteed. Nothing here is a recommendation to buy, hold, or sell any security. Additional information is available in our Form ADV Part 2A.