Tax Planning Guide for Executives

Net Unrealized Appreciation (NUA): How Executives Handle Company Stock in a 401(k)

Net unrealized appreciation is the growth in value of your employer's stock while it sat inside your 401(k). Under IRS rules, a qualifying lump-sum distribution may let you pay ordinary income tax only on the shares' cost basis now, with the appreciation taxed later at long-term capital gains rates when you sell.

By Defiant Capital Group. Rules cited as of October 13, 2026.

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What Is Net Unrealized Appreciation?

The Definition in Plain Terms

Net unrealized appreciation (NUA) is the difference between what you originally paid for employer shares inside a qualified plan (your cost basis) and their market value when they are distributed. IRS Publication 575 explains that when employer securities leave the plan as part of a lump-sum distribution, the basis is generally taxed as ordinary income in that year, while the NUA is generally deferred until the shares are sold.

For executives who accumulated company stock over many years, that split between ordinary income and capital gains treatment is the core reason NUA comes up at retirement or a job change. Whether it helps depends on your basis, your bracket, and how much of your net worth is tied to one company.

Key Takeaways

1NUA generally requires a lump-sum distribution of your entire balance in the employer's plans of the same type within one tax year, after a qualifying event.
2The cost basis is taxed now as ordinary income. The appreciation is generally taxed as long-term capital gain when sold.
3NUA does not reduce concentration risk by itself, and NUA does not receive a step-up in basis at death.
4Pennsylvania applies its own rules, so the state result may differ from the federal result.

NUA by the Numbers

Figures That Shape the NUA Decision

10%

Additional federal tax that may apply to the taxable basis before age 59½ (IRS Topic 558)

Separation-from-service age at which an exception to that additional tax generally applies for qualified plans

3.07%

Pennsylvania personal income tax rate, per the PA Department of Revenue

Box 6

Where deferred NUA is reported on Form 1099-R, per IRS Publication 575

How NUA Works

The Three-Step NUA Process

NUA is a sequence of steps that must happen in the right order and within one tax year. Getting one step wrong can disqualify the strategy.

Take a Lump-Sum Distribution

After a qualifying event, distribute your entire balance from all of the employer's qualified plans of the same type within a single tax year. Partial withdrawals in an earlier year after the same triggering event can complicate eligibility, so plan the timing before any money moves.

Move Employer Shares In-Kind to a Taxable Account

The employer stock is transferred as shares, not sold for cash, into a taxable brokerage account. The rest of the balance, such as mutual funds and cash, is commonly rolled to an IRA to keep its tax deferral. Many plans allow you to send only some employer shares to the taxable account and roll the remainder.

Pay Ordinary Income Tax on the Cost Basis

The plan's cost basis in the shares is included in your income for the year of distribution. The NUA is generally not taxed until you sell, and then it is generally treated as long-term capital gain. Any growth after the distribution is taxed separately, based on how long you hold the shares after they leave the plan.

NUA Rules

Triggering Events and What Can Disqualify You

IRS Publication 575 lists four events that can open the door to a lump-sum distribution. Year-end is often when executives who are retiring or changing jobs face this decision.

Separation From Service

Retiring, resigning, or being let go. This event applies to employees, not self-employed individuals.

Reaching Age 59½

May allow NUA while you are still employed, if your plan permits in-service distributions.

Disability

Under IRS rules, this triggering event applies to self-employed individuals.

Death

Beneficiaries may be able to use NUA treatment on inherited employer shares.

Common Disqualifiers

Rolling the employer shares into an IRA first. Once the stock is inside an IRA, NUA treatment is generally no longer available for those shares.
Spreading the distribution of your full balance across two tax years.
Selling the shares inside the plan and distributing cash instead of moving shares in-kind.
Missing that other qualified plans of the same type at the same employer must also be distributed.

Side-by-Side

NUA vs. IRA Rollover for Company Stock

Neither path is right for everyone. This comparison summarizes general federal treatment; your plan documents and tax situation control the actual result.

Factor	NUA Distribution	IRA Rollover
Tax at distribution	Ordinary income on cost basis in the year shares are distributed	None at rollover
Tax on appreciation	NUA generally taxed as long-term capital gain when sold	All withdrawals generally taxed as ordinary income
Early withdrawal tax	May apply to the taxable basis before 59½, unless an exception applies	May apply to IRA withdrawals before 59½, unless an exception applies
Required minimum distributions	Shares in a taxable account are not subject to RMDs	Subject to RMD rules
Step-up at death	No step-up on the NUA portion; post-distribution growth may be treated differently	No step-up; beneficiaries generally pay ordinary income tax on withdrawals
Concentration risk	Remains unless you sell or diversify	Can be diversified inside the IRA without an immediate tax event
Generally fits when	Basis is low relative to market value and you can absorb the current-year tax	Basis is high, or full tax deferral and simple diversification are priorities

Pennsylvania Angle

How Pennsylvania Taxes an NUA Distribution

Pennsylvania has its own rules for retirement distributions. According to the PA Department of Revenue gross compensation guide, distributions from eligible Pennsylvania retirement plans are generally not taxable when received after retirement and after meeting the plan's retirement-age or service requirements. The same guide notes that a plan's federal qualified status does not decide its treatment for Pennsylvania personal income tax.

For distributions that don't meet those conditions, PA PIT Bulletin 2005-05 (Qualified Employer Plans) describes a cost-recovery approach. Distributions are not treated as income until your previously taxed contributions have been recovered, and amounts beyond that may be taxable as compensation.

How Pennsylvania treats the appreciation when you later sell the distributed shares, including your Pennsylvania basis, should be confirmed with your CPA. For Pittsburgh-area executives, that means modeling the federal and state results separately. Our Pennsylvania capital gains guide explains how the state treats gains more broadly.

Pennsylvania Questions to Raise With Your Advisor and CPA

Have I met my plan's retirement-age or service requirement?

What are my previously taxed contributions for PA cost recovery?

What is my Pennsylvania basis in the distributed shares, and how will a future sale be taxed?

Do I expect to remain a Pennsylvania resident when I sell?

Integrated Planning

How NUA Fits With Roth Conversions, RMDs and Concentration Risk

NUA is rarely a standalone decision. The year you take the distribution also adds income that interacts with the rest of your plan.

Roth Conversion Timing

The taxable basis and any Roth conversion both add ordinary income. Stacking them in one year may push you into a higher bracket, while spacing them out may help manage that, depending on your projected income. See our guides to Roth conversions after RMD age and Roth conversion strategy for high earners.

Future RMDs

Shares moved to a taxable account sit outside the RMD system, which can reduce the size of later required withdrawals from the rolled-over IRA. The trade-off is paying some tax sooner. Review the 2026 RMD rules before deciding.

Concentration Risk

Holding a large position in one employer's stock exposes you to that company's specific risks, and NUA can create an incentive to keep holding. A phased selling plan, charitable gifts of appreciated shares, or other approaches may be considered alongside your broader W-2 tax planning strategy.

Holding RSUs or options as well? Our guide to tax planning for equity compensation covers how those grants interact with 401(k) company stock.

Balanced View

The Trade-Offs of an NUA Strategy

NUA can shift part of a 401(k) from ordinary income treatment to capital gains treatment, but it is not a free benefit. Results depend on individual circumstances, and for some executives a straightforward IRA rollover may be the more suitable path.

Jonathan Dane, CFA, CFP®, reviews NUA decisions as part of a client's full tax, investment, and estate picture, coordinating with the client's CPA so the federal and Pennsylvania calculations are modeled before any shares move. As an independent, fiduciary RIA, Defiant Capital Group does not sell products tied to this decision, though, like any advisory firm, conflicts may still exist and are disclosed in our Form ADV.

1The basis is taxed now. You give up deferral on that amount, and a higher basis reduces the potential advantage.
2Concentration risk remains. The tax treatment does not change how much of your wealth depends on one company.
3No step-up on NUA at death. Heirs may still owe capital gains tax on the NUA portion.
4Execution is unforgiving. Timing, plan rules, and the in-kind transfer must line up within one tax year.
5Tax rules can change. Current law may not stay the same through the years you plan to sell.

FAQ

Net Unrealized Appreciation: Frequently Asked Questions

How does net unrealized appreciation work?

NUA works by distributing employer stock in-kind from a qualified plan as part of a lump-sum distribution. You generally pay ordinary income tax on the cost basis that year, and the appreciation is generally taxed as long-term capital gain when you sell.

Is NUA worth it?

NUA may be worth considering when the shares' cost basis is low compared with their market value and you can absorb the current-year tax. It tends to be less attractive when basis is high, when you need full tax deferral, or when the added concentration risk outweighs the tax difference.

What disqualifies you from NUA?

Common disqualifiers include rolling the employer shares into an IRA, failing to distribute your entire balance from the employer's plans of the same type within one tax year, and selling the shares inside the plan instead of transferring them in-kind.

Can you do NUA before retirement?

Yes, in some cases. Reaching age 59½ is a triggering event, so an employee may be able to use NUA while still working if the plan allows in-service distributions. A job change before retirement is also a separation from service. If you are under 59½, the 10% additional tax may apply to the taxable basis unless an exception, such as separating from service in or after the year you turn 55, applies.

Does NUA stock get a step-up in basis at death?

No. The NUA portion generally does not receive a step-up in basis at death, so heirs may owe capital gains tax on it when they sell. Appreciation after the shares left the plan may be treated differently.

Do you pay taxes on unrealized gains in company stock?

Generally not until you sell. With NUA, the appreciation that built up inside the plan is deferred and reported in Form 1099-R, box 6, and is generally taxed only when the shares are sold or exchanged.

Sources (as of October 13, 2026)

Before Shares Leave Your Plan

Model Your NUA Decision Before Year-End

If you are retiring or changing jobs with company stock in your 401(k), Defiant Capital Group can help you compare NUA with an IRA rollover across federal tax, Pennsylvania tax, Roth conversion timing, and concentration risk. Outcomes depend on your plan and personal circumstances.