Employees who hold appreciated company stock inside a 401(k) have access to a tax strategy most retirement savers never use, and most 401(k) providers never mention: Net Unrealized Appreciation, or NUA. Used correctly, it converts a large chunk of what would otherwise be ordinary-income taxation into long-term capital gains — but it requires acting before you roll your account into an IRA, not after.
What Net Unrealized Appreciation Actually Is
NUA is the difference between the current fair market value of employer stock held inside a qualified retirement plan and the plan’s original cost basis in those shares — what the plan actually paid to acquire them, often years or decades ago through payroll contributions or matches. If a 401(k) holds employer stock now worth $400,000 that the plan paid $80,000 for over the years, the NUA is $320,000.
How the Strategy Works
Under Internal Revenue Code Section 402(e)(4), if you take a lump-sum distribution of your 401(k) and have the employer stock portion distributed in-kind directly into a taxable brokerage account (not rolled into an IRA), you pay ordinary income tax immediately only on the plan’s original cost basis in the stock. The NUA itself — the appreciation — is not taxed at distribution. When you eventually sell the shares, that NUA portion is taxed at long-term capital gains rates regardless of how long you’ve personally held the shares after the distribution, since the IRS treats the NUA as long-term by statute.
Why the Capital Gains Rate Matters So Much
The gap between ordinary income tax rates (up to 37% federally in 2026) and long-term capital gains rates (0%, 15%, or 20%, based on 2026 brackets of roughly $49,450 and $545,500 for single filers, and $98,900 and $613,700 for joint filers) can be enormous on a large stock position. A retiring executive or long-tenured employee with hundreds of thousands of dollars in embedded gains can save tens or even six figures in tax by using NUA instead of simply rolling everything into a traditional IRA and paying ordinary rates on every future withdrawal.
The Irreversible Mistake: Rolling to an IRA First
The single most costly error is rolling the 401(k) — including the company stock — into an IRA before executing the NUA distribution. Once inside an IRA, all future withdrawals are taxed as ordinary income no matter what the underlying asset is, and the NUA opportunity on those shares is gone permanently. The in-kind distribution to a taxable brokerage account has to happen as part of a “lump-sum distribution” of the entire plan balance within a single tax year, triggered by an event like separation from service, reaching age 59½, disability, or death.
Who NUA Actually Makes Sense For
This strategy is most valuable when the embedded gain is large relative to the cost basis (meaning most of the value is appreciation, not contributions), and when you’re comfortable holding a concentrated, undiversified position in one company’s stock rather than immediately diversifying inside an IRA. It’s a specific, situational tool — not a default move — and the lump-sum distribution requirement means it needs planning before you separate from the employer, not after the rollover paperwork is already filed.
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Related reading: RSU Taxation 2026 and 2026 Retirement Contribution Limits: 401(k) and IRA.
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