Optimizing Taxes with a Net Unrealized Appreciation (NUA) Strategy
For many long-time employees, company stock in a retirement plan may represent one of the most overlooked opportunities for tax savings. Over time, that stock can grow in value, creating what tax professionals call net unrealized appreciation (NUA). If you hold employer stock in a qualified retirement plan, the NUA rule may allow you to manage taxes in a way that lowers your tax bill and preserves more of your retirement savings.
This tax strategy can be powerful, but the rules are complex. At New England Private Wealth Advisors, LLC, we believe informed decisions lead to stronger outcomes.
Key Takeaways
- NUA can turn growth in employer stock into long-term capital gains. Instead of paying ordinary income tax on the entire balance, NUA allows the appreciation in company stock to be taxed at more favorable capital gains rates.
- Eligibility requires strict IRS rules. The NUA strategy only applies when certain distribution conditions are satisfied. Chief among them: the employer stock must be taken as an in-kind distribution to a brokerage account. Rolling it into an IRA eliminates eligibility for the NUA tax break.
- NUA is powerful but not for everyone. While NUA treatment can significantly reduce lifetime tax liability and aid in estate planning, it also carries risks including immediate taxation of the cost basis and concentration in employer stock. Careful evaluation with a qualified advisor is critical.
What Is Net Unrealized Appreciation?
NUA is the difference between the original cost basis of employer stock held inside a tax-qualified retirement plan and the current market value of that stock when distributed. Simply put, NUA is the increase in value of your company stock while held in your retirement account — the difference between what you paid for the shares and their current value.
For example, consider an employee who holds company stock in a 401(k) with a cost basis of $50,000. If the current market value of that stock is $200,000, the NUA would equal $150,000. That $150,000 difference is the core of the NUA strategy — and where the potential tax savings arise.
It is important to note that several additional regulatory conditions must be satisfied for the tax benefits to apply, which are covered in greater detail below.
Mechanics of the NUA Tax Strategy
Withdrawals from traditional retirement accounts are generally taxed as ordinary income, meaning every dollar distributed is taxed at ordinary income tax rates. The NUA strategy takes advantage of a significant exception specifically for employer stock distributions.
When an individual takes a lump-sum distribution of employer stock from a qualified retirement plan, the IRS applies a bifurcated taxation approach. The cost basis is taxed immediately at ordinary income rates. However, the appreciation above this basis (the NUA portion) is not taxed at distribution. Typically, the appreciated company stock is transferred, in-kind, to a taxable brokerage account. When the company stock is eventually sold within the taxable account it is subject to long-term capital gains tax. This favorable long-term capital gain tax rate applies even if the stock is sold shortly after distribution.
Given the often sizable difference between ordinary income and capital gains rates, this tax treatment can translate into meaningful savings.
Eligibility Requirements
The IRS has set strict rules related to the taxation of NUA.
Lump-Sum Distribution: The entire vested balance, across all qualified retirement plans of the same type with the employer, must be distributed within a single tax year. Importantly, this does not require withdrawing all employer stock simultaneously; partial in-kind distributions of stock are permissible as long as the full plan balance is distributed during the year. In addition, any nonemployer stock held in the employer retirement plan may be rolled over to an IRA to avoid immediate taxation.
Qualifying Events: The distribution must occur after a triggering event such as retirement, separation from service, reaching age 59½, or death.
Direct Rollover: The company stock must be distributed into a taxable brokerage account rather than rolled into an IRA.
If these rules are not followed, you may lose access to the special NUA tax treatment.
Tax-Qualified Plans Eligible for NUA
- 401(k) plans (limited to traditional 401(k)s; Roth 401(k)s are not eligible for NUA treatment)
- Profit-sharing retirement plans that hold employer securities
- Retirement ESOPs (Employee Stock Ownership Plans)
Plans Not Eligible for NUA
- Traditional IRAs
- Roth IRAs & 401(k)s
- SEPs and SIMPLE IRAs
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Potential Tax Savings of the NUA Rule
When used strategically, NUA can give investors flexibility in managing income and planning their legacy.
Capital Gains Tax Treatment
Employees with highly appreciated company stock may benefit by having the growth taxed as capital gains rather than ordinary income, potentially reducing their overall tax liability.
Control Over Timing
A key benefit of NUA is timing flexibility. Once the stock is in a taxable account, investors can decide when to sell and recognize gains, even across multiple tax years, helping them manage taxes more strategically.
Legacy Planning
NUA carries notable benefits for estate planning and wealth transfer. When employer stock is inherited, beneficiaries typically pay capital gains tax on any future appreciation rather than ordinary income tax, often resulting in more favorable tax treatment.
These advantages depend on current estate tax laws and can significantly influence how retirement assets are preserved and passed down. For families with substantial employer stock holdings, integrating NUA into a comprehensive legacy plan can enhance intergenerational wealth preservation.
Considerations and Risks
While the NUA tax strategy can provide substantial benefits, it is not universally appropriate. Investors should carefully weigh the following considerations:
Concentration Risk: Holding a significant portion of retirement assets in employer stock may expose the portfolio to heightened volatility and company-specific risk, which could jeopardize long-term financial stability.
Immediate Taxation of Cost Basis: When employer stock is distributed, its cost basis is taxed at ordinary income rates in that year, creating a current tax liability that requires management.
State Tax Implications: Variations in state tax laws may reduce or change the expected federal tax benefits of NUA, making individualized evaluation essential.
Net Investment Income Tax (NIIT): Taxpayers with modified adjusted gross income that exceeds the IRS income thresholds for their filing status may be subject to an additional 3.8% tax on net investment income, which would include the long-term capital gain from the sale of company stock through NUA. For 2025, these thresholds are $250,000 for those married filing jointly or qualifying widow(er), $200,000 for single filers or heads of household, and $125,000 for those married filing separately. The tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds these thresholds. This ensures the tax targets taxpayers who have both significant investment income and high overall earnings.
Loss of Tax Deferral: Unlike rollovers into IRAs, NUA distributions place assets into taxable accounts, eliminating the benefit of tax-deferred growth and altering the timing and recognition of capital gains.
Because these decisions involve multiple layers and long-term financial impact, consulting a qualified tax professional and a seasoned financial advisor is essential to assess whether an NUA strategy fits overall retirement and wealth goals.
NUA Tax Strategy vs. Direct Rollover
Many people default to rolling employer stock into an IRA at retirement. While that may be appropriate in some cases, it results in the entire balance being taxed as ordinary income upon withdrawal from the IRA.
The right approach depends on your tax bracket, the amount of appreciation, and your retirement income needs.
NUA Tax Strategy
Direct Rollover
Concentration Risk: Retaining employer stock in a taxable account may increase portfolio risk due to lack of diversification.
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How NEPWA Can Help
Although NUA offers the potential for significant tax savings, its complexity necessitates thoughtful planning and personalized advice to avoid costly mistakes. At NEPWA, we guide clients through important financial decisions, including tax support for retirement savings alongside you and your tax advisor. We understand that each situation is different, and we partner with you to find the best path forward.
The NUA rule is an often underutilized tax benefit for people with employer stock in retirement plans. When applied correctly, it can reduce your tax bill, unlock capital gains treatment, and preserve more of your retirement savings. Our advisors work alongside you to evaluate the tax implications of net unrealized appreciation and help you make choices that align with your long-term goals.
Contact NEPWA to discuss how you can take advantage of NUA and whether it is the right approach for your financial goals.
