401(k) rollover glossary
Net Unrealized Appreciation (NUA)
NUA is a special tax election for 401(k) accounts that hold appreciated employer stock. It lets you pay lower long-term capital gains tax on the stock's growth instead of ordinary income tax — but the election must be made at distribution.
Net Unrealized Appreciation (NUA) is the difference between the original cost of employer stock in your 401(k) (the 'cost basis') and its current market value. When you leave a job, the IRS allows a special election: instead of rolling the employer stock into an IRA (where all future withdrawals are taxed as ordinary income), you take a lump-sum distribution of the stock and hold it in a taxable brokerage account.
Under the NUA election, you pay ordinary income tax on the cost basis — the original price your employer paid for the stock in your plan — when you take the distribution. The appreciation (the difference between basis and current value) is then taxed at the preferential long-term capital gains rate when you eventually sell the stock.
Long-term capital gains rates are typically 15% or 20% for most taxpayers, compared to ordinary income tax rates of 22%–37%. On $500,000 of appreciated employer stock, the NUA election could save $50,000–$100,000 in lifetime taxes.
The NUA election must be made at the time of distribution — specifically, it requires a lump-sum distribution of the entire plan in a single tax year. You cannot roll the employer stock into an IRA and later elect NUA. Once the stock is in the IRA, the election is permanently lost.
NUA is worth evaluating whenever you have appreciated employer stock in your 401(k). The NUA strategy makes the most sense when: (1) the stock has appreciated significantly since being added to the plan, (2) you are in a high ordinary income tax bracket, and (3) you plan to hold the stock for some time after distribution. Use the NUA analyzer to model the trade-off for your specific situation before deciding.
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Frequently asked questions
- Does NUA apply to all employer stock or only stock I bought myself?
- NUA applies to employer stock inside your 401(k), whether it came from employer matching contributions, profit-sharing contributions, or employee contributions that purchased employer stock. It does not apply to stock you hold in a regular brokerage account outside the plan.
- Can I roll part of my 401(k) to an IRA and elect NUA on just the stock?
- Yes — in most cases. The stock portion can be distributed in-kind (taking the actual shares) while the non-stock portion rolls to a Traditional IRA. However, the lump-sum distribution rules are strict; consult a CPA to confirm your plan qualifies.
- What happens to the NUA appreciation if I die before selling the stock?
- Your heirs receive a stepped-up cost basis on the stock at your death, which may eliminate the capital gains on the appreciation entirely. This makes NUA even more powerful in some estate planning scenarios.
Related terms
This glossary entry provides educational information based on IRS rules. It is not tax or legal advice for your specific situation.