“I’m retiring next year and have $3 million in my 401(k), including $800,000 in company stock with a cost basis of about $250,000. I’ve been reading about NUA strategies. Could I use this to help me pay less in taxes when I sell the stock?”
What NUA Actually Does
Net Unrealized Appreciation (NUA) is one of the lesser-known strategies in the tax code. If you hold company stock inside your 401(k) that has appreciated significantly, NUA lets you treat the growth differently than the rest of your retirement account.
Here’s how it works in your case:
- You have $800,000 of company stock with a $250,000 cost basis.
- Normally, if you roll everything into an IRA, all future withdrawals are taxed as ordinary income.
- With NUA, you can move the company stock into a taxable brokerage account instead. You’ll pay ordinary income tax only on the $250,000 cost basis. The $550,000 of gains will be treated as long-term capital gains whenever you sell—potentially at a much lower tax rate.
The rest of your 401(k)—the other $2.2 million—still rolls into an IRA as usual.
When This Makes Sense
NUA is most attractive if:
- You expect to remain in a high tax bracket in retirement. With $3 million in your 401(k), that’s likely.
- You want the option to sell company stock later at capital gains rates rather than income tax rates.
- You can time the transfer for a low-income year—for example, the year after you retire but before you claim Social Security.
The Catch: Concentration Risk
While the tax treatment sounds great, there’s a tradeoff.
If you sell the stock inside your 401(k) or IRA, you could immediately diversify your portfolio and avoid the risk of having $800,000 tied up in one company. The downside is you’ll pay ordinary income tax on every withdrawal.
With NUA, you keep the stock in a taxable account until you decide to sell. That means you still carry the concentration risk. And if you sell it all at once, you’ll face a very large capital gains bill in addition to the ordinary income on the cost basis.
Key Takeaways
- NUA can save you significant taxes if you have highly appreciated company stock in your 401(k).
- You’ll pay ordinary income tax only on the cost basis; the growth is taxed later at capital gains rates.
- Timing matters. A year with lower income is ideal for triggering the NUA.
- Don’t forget the investment risk—holding a large single-stock position can undermine the tax savings if that stock drops in value.
NUA can be powerful, but it’s not a free lunch. It’s worth running the numbers carefully—and weighing the diversification tradeoff—before deciding.
For more perspective on NUA and retirement tax planning, listen to the full podcast episode here.