Net unrealized appreciation lets you tax employer stock basis as ordinary income and its appreciation at long-term capital gains rates of 0%, 15%, or 20% when you sell.
Key Takeaways
- NUA is authorized by IRC Section 402(e)(4) and IRS Notice 98-24 for employer stock held in a qualified plan.
- The cost basis is taxed as ordinary income (10% to 37% in 2026) in the year of the in-kind distribution.
- The appreciation is taxed at 2026 long-term capital gains rates of 0%, 15%, or 20% when you sell the shares.
- NUA requires one of four triggering events: separation from service, age 59 and a half, death, or total disability.
- The strategy needs a lump-sum distribution of the entire vested plan balance within one tax year.
- A basis distribution before age 59 and a half carries a 10% early-withdrawal penalty on the basis.
- A large NUA sale can trigger the 3.8% Net Investment Income Tax above $200,000 single or $250,000 married filing jointly.
NUA Tax Figures for 2026
Rates are 2026 figures; NUA treatment requires a qualifying lump-sum distribution under IRC Section 402(e)(4). Examples in the article are hypothetical illustrations.
Net unrealized appreciation (NUA) is the gain on employer stock held inside a 401(k), measured from the plan’s cost basis to the fair market value of the shares at distribution. The NUA tax rules let eligible investors pay ordinary income tax on only the low cost basis, then long-term capital gains rates on the appreciation when the shares are later sold, rather than ordinary rates on the entire balance.
Under IRC Section 402(e)(4), net unrealized appreciation lets you move appreciated employer stock from a 401(k) to a taxable brokerage account in a qualifying lump-sum distribution. You pay ordinary income tax on the cost basis at distribution and long-term capital gains rates (0%, 15%, or 20% in 2026) on the NUA when you sell, instead of ordinary rates up to 37% on the whole balance rolled to an IRA.
What is net unrealized appreciation (NUA)?
Net unrealized appreciation is the difference between the cost basis of employer stock inside a qualified plan (what the plan paid for the shares) and the fair market value of those shares at distribution. IRC Section 402(e)(4) and IRS Notice 98-24 authorize NUA treatment, which shifts the appreciation out of ordinary income and into long-term capital gains when you eventually sell.
Suppose the plan bought your employer shares at an average of $20 and they are now worth $100. The cost basis is $20 per share and the NUA is $80 per share. When you take a qualifying lump-sum distribution that includes employer securities, you can elect to have the stock distributed in kind to a taxable account instead of rolling it to an IRA. That election is what preserves capital gains treatment on the appreciation.
The benefit exists because a traditional IRA converts every future dollar of value, basis and appreciation alike, into ordinary income at withdrawal. NUA carves the appreciation out of that ordinary income bucket. Only employer stock inside a qualified plan is eligible. Ordinary mutual funds, an outside brokerage position, or an IRA holding do not qualify.
How is net unrealized appreciation taxed?
NUA is taxed in two parts. At distribution, you owe ordinary income tax (up to 37% in 2026) on the cost basis of the shares. When you later sell, the NUA is taxed at long-term capital gains rates of 0%, 15%, or 20%, regardless of how long you held the shares after distribution. Any growth after distribution follows a new holding period.
The two-part structure is the core of the strategy. The table below shows how each slice of value is treated.
| Component | What it covers | 2026 rate | When taxed |
|---|---|---|---|
| Cost basis | Original price the plan paid for the shares | Ordinary income, 10% to 37% | Year of the in-kind distribution |
| NUA | Fair market value at distribution minus cost basis | Long-term capital gains, 0% / 15% / 20% | When you sell the shares |
| Post-distribution gain | Growth after the shares leave the plan | Short or long-term capital gains (new holding period from the distribution date) | When you sell the shares |
The 2026 long-term capital gains brackets determine the rate on the NUA slice at sale. A large NUA sale can span more than one rate and can also trigger the 3.8% Net Investment Income Tax once modified adjusted gross income passes $200,000 single or $250,000 married filing jointly.
| 2026 long-term capital gains rate | Single taxable income | Married filing jointly |
|---|---|---|
| 0% | Up to $49,450 | Up to $98,900 |
| 15% | $49,451 to $545,500 | $98,901 to $613,700 |
| 20% | Above $545,500 | Above $613,700 |
The four triggering events for NUA
NUA treatment is only available after one of four triggering events defined by the IRS: separation from service, reaching age 59½, death, or total disability. At least one must occur before the qualifying lump-sum distribution. The event opens the window, but the distribution itself can happen in that year or a later year, as long as the timing rules are met.
- Separation from service. Retirement, termination, or resignation from the employer that sponsors the plan.
- Reaching age 59½. Available even if you are still working for the employer, subject to the plan allowing in-service distributions.
- Death. A beneficiary may use NUA on inherited employer stock.
- Total disability. As defined under the tax code for the plan participant.
How the NUA strategy works step by step
Executing NUA correctly means taking a lump-sum distribution of the entire vested balance of the plan within one tax year, sending the employer stock in kind to a taxable account, and rolling the rest to an IRA. You pay ordinary income tax on the basis that year, plus a 10% early-withdrawal penalty on the basis if you are under 59½.
- Confirm a triggering event. Separation from service, age 59½, death, or disability must have occurred.
- Take a lump-sum distribution. The entire vested balance of that plan type must be distributed within a single tax year. The distribution does not have to fall in the same year as the triggering event, but no intervening distribution can have already occurred (see the trap below).
- Send the shares in kind. The employer stock moves as shares to a taxable brokerage account, not liquidated to cash, which preserves NUA treatment.
- Roll the remainder to an IRA. Non-stock assets (funds, bonds, cash) can go to a traditional IRA and stay tax-deferred. You may selectively apply NUA to only the lowest-basis lots and roll the higher-basis shares to the IRA.
- Pay ordinary tax on the basis. The cost basis is ordinary income in the distribution year. If you are under 59½, a 10% early-withdrawal penalty applies to the basis amount as well.
- Pay capital gains at sale. The NUA is long-term capital gain whenever you sell. Any post-distribution growth uses a fresh holding period that starts on the distribution date.
NUA versus rolling everything to an IRA
Rolling employer stock to an IRA turns all of it into future ordinary income. NUA taxes only the basis as ordinary income and the appreciation as long-term capital gains. The wider the gap between your ordinary rate and your capital gains rate, and the larger the NUA relative to basis, the more the two paths diverge. The illustration below shows the mechanics.
The table is a hypothetical illustration using assumed 2026 rates for a single filer holding 5,000 shares: cost basis $20 per share ($100,000 total), fair market value $100 per share ($500,000 total), and NUA of $80 per share ($400,000 total). It is not a prediction or a promise of savings. Actual figures depend on your brackets, state tax, the Net Investment Income Tax, and when you sell.
| Path | Ordinary income tax | Long-term capital gains tax | Illustrative total tax |
|---|---|---|---|
| Roll all $500,000 to an IRA, later withdraw (assume 24% ordinary) | $120,000 on $500,000 | None | $120,000 |
| NUA: basis to income, appreciation to gains (assume 24% ordinary, 15% gains) | $24,000 on $100,000 basis | $60,000 on $400,000 NUA | $84,000 |
In this hypothetical, the difference is $36,000, driven entirely by moving $400,000 out of ordinary income and into the 15% capital gains rate. The result narrows or reverses when the basis is high relative to value, when your ordinary and capital gains rates are close, or when a large NUA sale pushes part of the gain into the 20% bracket or triggers the 3.8% Net Investment Income Tax.
The partial distribution trap and order of operations
The most common way investors lose NUA is by taking a partial distribution from the plan after a triggering event but before the NUA lump-sum. Any intervening distribution after the triggering event generally disqualifies NUA until a new triggering event occurs. The order of operations is fixed: complete the NUA lump-sum first, then take any other distributions.
Consider a common sequence. You retire, which is a separation-from-service triggering event, then pull a small amount from the 401(k) to cover expenses. That partial withdrawal can burn the NUA opportunity tied to that triggering event. To reset, you would need a fresh triggering event, such as reaching age 59½, becoming disabled, or death. Because the lump-sum requires the entire vested balance to leave the plan in one tax year, a stray rollover or withdrawal earlier in the same year can also break the lump-sum. Model the sequence before touching the account.
The stranded basis downside
NUA has a real downside: you prepay ordinary income tax on the basis in the distribution year, and that tax is not refundable if the stock later falls. If the shares drop below the basis you were taxed on, you hold a capital loss that only offsets capital gains plus $3,000 of ordinary income per year, which can leave the tax cost stranded for years.
This risk grows with volatile stocks and with concentrated positions in a single employer. Distributing the shares also keeps you in a concentrated holding, which carries investment risk separate from the tax question. Investors weighing NUA on a stock that has recently run up may want to model a decline scenario, not just the favorable case, before making the irreversible in-kind election.
Coordinating NUA with Roth conversion timing
NUA and Roth conversions compete for the same bracket space. The basis you recognize as ordinary income in the NUA year raises your taxable income and can crowd out headroom for a Roth conversion that year. Many investors separate the two: run the NUA lump-sum in one year, then begin conversions in later years once the one-time basis income is behind them.
Because the basis is ordinary income, stacking a large NUA distribution and a large Roth conversion into the same year can push both through higher brackets and toward Medicare IRMAA thresholds. Deciding how much to convert in a given year, and mapping the multi-year sequence against a conversion break-even analysis, helps keep the two strategies from colliding. Coordinating both with future required minimum distributions, which begin at age 73 (or age 75 for those born in 1960 or later), rounds out the projection.
Selective NUA and estate treatment
You do not have to apply NUA to every share. A selective approach applies NUA to the lowest-basis lots, where the appreciation is largest, and rolls the higher-basis shares to an IRA. At death, NUA stock is a middle ground: post-distribution growth generally gets a step-up in basis, but the NUA itself is income in respect of a decedent (IRD) with no step-up.
That estate treatment separates NUA stock from both a normal brokerage position and an IRA. Heirs receive a step-up on the appreciation that accrued after distribution, yet they inherit the original NUA as a built-in gain and pay long-term capital gains tax on it when they sell. A traditional IRA, by contrast, has no step-up and is fully ordinary income to heirs, while a regular taxable account typically gets a full step-up. For charitably inclined owners, donating NUA shares during life, including through a donor-advised fund, can sidestep the capital gains tax on the appreciation while supporting a cause.
Frequently asked questions
What is the NUA rule?
The NUA rule, set out in IRC Section 402(e)(4) and IRS Notice 98-24, lets you distribute employer stock from a 401(k) or other qualified plan to a taxable account in a lump-sum. You pay ordinary income tax on the cost basis at distribution, and the net unrealized appreciation is taxed at long-term capital gains rates when you sell the shares.
How is net unrealized appreciation taxed?
Net unrealized appreciation is taxed in two parts. The cost basis is ordinary income (10% to 37% in 2026) in the year of the in-kind distribution. The NUA is long-term capital gain (0%, 15%, or 20% in 2026) whenever you sell, regardless of holding period. Growth after distribution follows a new holding period starting on the distribution date.
What is the downside of NUA?
The main downside is stranded basis: you prepay ordinary income tax on the basis, and that tax is not recoverable if the stock falls, since the resulting capital loss offsets only gains plus $3,000 of ordinary income per year. NUA also leaves you concentrated in one stock, and recognizing the basis as income can crowd out Roth conversion room that year.
Is NUA worth it?
NUA tends to help most when the stock has a low cost basis relative to value and your ordinary income rate is well above your capital gains rate. It is less compelling when the basis is high, your brackets are low, or the stock is volatile. Because the in-kind election is irreversible, many investors model NUA against a full IRA rollover before deciding.
How do you calculate net unrealized appreciation?
Net unrealized appreciation equals the fair market value of the employer shares at distribution minus the plan’s cost basis in those shares. If the plan paid $20 per share and the shares are worth $100 at distribution, the NUA is $80 per share. Across 5,000 shares, that is $100,000 of basis and $400,000 of NUA.
Does NUA count as ordinary income?
The NUA itself does not count as ordinary income; it is long-term capital gain taxed only when you sell. What counts as ordinary income is the cost basis of the distributed shares, taxed in the distribution year at rates up to 37% in 2026, plus a 10% early-withdrawal penalty on the basis if you are under age 59½.
What is a triggering event for NUA?
A triggering event is one of four IRS-defined events that open the NUA window: separation from service (retirement, termination, or resignation), reaching age 59½, death, or total disability. At least one must occur before the qualifying lump-sum distribution, and no intervening distribution can have happened after the event and before the NUA lump-sum.
Can you do NUA after rolling to an IRA?
No. Once employer stock is rolled from a 401(k) into a traditional IRA, the NUA opportunity is permanently lost, and all future withdrawals, including the appreciation, become ordinary income. This is why the NUA decision has to be made before the rollover, working with a qualified advisor who can model both paths first.
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Q3 Advisors is a registered investment adviser focused on retirement tax planning. This page is educational and is not advice; consult a qualified professional.
