Adviso Wealth

Menu

The $100K Tax Mistake Hidden in Your 401(k) Net Unrealized Appreciation

If you’re a high-income executive or professional with company stock in your 401(k), there’s a silent tax strategy sitting in your portfolio—waiting to be used or missed.

It’s called Net Unrealized Appreciation, or NUA. And while it sounds like something only a tax accountant would care about, NUA can be one of the most powerful ways to turn decades of work into tax-efficient retirement income.

Used correctly, it can save you five or six figures in taxes. Used incorrectly—or ignored—it can cost you just as much.

In this guide, I’ll walk you through:

  • What NUA is and why it matters
  • When to consider it
  • How to handle it in a taxable account
  • Why it may not be ideal for your heirs
  • And how to use it for charitable giving and early retirement planning

What Is Net Unrealized Appreciation (NUA)?

NUA is the difference between what you paid for your company stock inside your 401(k) and what it’s worth today.

If your 401(k) includes $500,000 of employer stock that you purchased for $100,000, the $400,000 in appreciation is your Net Unrealized Appreciation.

Most people, when they retire or leave a company, roll over their 401(k) into an IRA. That sounds smart—but if you do that with company stock, all withdrawals will eventually be taxed at ordinary income tax rates.

The NUA strategy lets you choose a different path—one where the appreciation is taxed at long-term capital gains rates instead.

You didn’t spend your career building wealth just to lose a third of it to taxes in one avoidable rollover. If you’ve worked, saved, and stayed loyal to your company, the tax code actually gives you a reward—but only if you know where to look.

Why Use the NUA Strategy?

Let’s walk through a real-world example:

Case Study: John, 59, Retiring Tech Executive (We will make it H3 tag)

John is retiring from a Fortune 100 company after 25 years. His 401(k) is worth $1.2 million, and $400,000 of that is in company stock. His cost basis is $60,000.

Here’s what happens if he rolls the stock into an IRA:

  • The entire $400,000 will be taxed as ordinary income when withdrawn, possibly at a 35%+ rate.

Now here’s what happens if he uses the NUA strategy:

  • He pays ordinary income tax only on the $60,000 cost basis in the year of distribution.
  • The remaining $340,000 of growth is moved into a taxable account and will be taxed at long-term capital gains rates (typically 15–20%)—but only when he sells.

The NUA strategy saves him tens of thousands in taxes and gives him flexibility in how and when to use the money.

John didn’t get where he is by taking shortcuts. But like many of my clients, he never expected that the right strategy could give him both liquidity and tax savings—at a time when he needed both most.

What Are the Rules?

NUA isn’t automatic. You must meet a specific set of conditions:

  1. The shares must be distributed in-kind (not sold).
  2. You must have experienced a triggering event: retirement, turning 59½, death, or disability.
  3. You must take a lump-sum distribution of the entire 401(k) balance within a single tax year.

If these rules aren’t met, the NUA benefit disappears—and the full value becomes taxable at ordinary income rates when withdrawn from an IRA.

This is not something you decide casually. It requires planning and precision.

What Happens in a Taxable Account?

Once the NUA stock is transferred to a brokerage account, it loses the protections of a retirement plan. You need a game plan.

1. Understand Your New Cost Basis (We will make it H3 tag)

After the NUA distribution, the original cost basis becomes your cost basis in the brokerage account. In John’s case, that’s $60,000—not the full $400,000.

That means any time he sells the stock, he triggers long-term capital gains on the $340,000 of appreciation.

2. Decide When to Sell (We will make it H3 tag)

Selling triggers taxes. But since the NUA portion qualifies for long-term capital gains treatment, you can time the sale to coincide with low-income years (such as the early retirement gap years before Social Security and RMDs).

Or you might choose to sell gradually over time as part of a diversification plan.

One of the hardest things about a major transition—like retirement—is shifting from “growth mode” to “drawdown mode.” Knowing when to sell isn’t just about the market—it’s about your values, your tax picture, and your long-term plan.

There’s No Step-Up in Basis at Death

This is where NUA has a hidden drawback.

Most assets receive a step-up in basis at death—meaning heirs don’t pay capital gains tax. But NUA stock is an exception.

While heirs still get a step-up on post-distribution appreciation, the original NUA portion remains taxable. So if John dies with $400,000 in NUA stock, and $340,000 of it is NUA gain, his heirs will owe capital gains tax on that $340,000 when they sell.That’s a meaningful difference—and a reason to think carefully about whether NUA stock is a spending asset or a legacy asset.

Should NUA Be a Legacy Asset?

In most cases, probably not.

Here’s why:

  • No step-up in basis on the NUA portion
  • Single-stock concentration risk
  • No ongoing income or yield
  • More tax complexity for heirs

NUA stock works best as a bridge asset—something you draw from in the early years of retirement, especially when your income is low and tax brackets are favorable.

If you want to simplify your estate, reduce tax burdens for heirs, or maximize legacy giving, it may make sense to sell or donate NUA stock during your lifetime.

Bonus: Can You Donate NUA Stock to Charity?

Yes—and done correctly, it can be a powerful strategy.

Let’s revisit John. After executing his NUA strategy, he still holds some of that $400,000 in low-basis company stock. He doesn’t want to hold it forever—but he’s also feeling charitably inclined.

So he donates $100,000 of appreciated NUA stock to a Donor-Advised Fund.

Here’s what happens:

  • He avoids capital gains tax on the $100,000 appreciation
  • He receives a charitable deduction for the full fair market value—not just the cost basis
  • He reduces his taxable income for the year

But there are limits:

Charitable Deduction Limits for NUA Stock

John has an AGI of $300,000 and donates $100,000 of NUA stock.

  • He can deduct $90,000 this year (30% of AGI).
  • The remaining $10,000 carries forward.
  • The charity receives the full value tax-free.

Used thoughtfully, NUA stock can be converted into legacy giving without ever triggering a capital gain.

Example:

John has an AGI of $300,000 and donates $100,000 of NUA stock.

  • He can deduct $90,000 this year (30% of AGI).
  • The remaining $10,000 carries forward.
  • The charity receives the full value tax-free.

Used thoughtfully, NUA stock can be converted into legacy giving without ever triggering a capital gain.

Planning Considerations: Is NUA Right for You?

NUA isn’t one-size-fits-all. Here are the questions to ask:

  • Do you own low-basis company stock inside your 401(k)?
  • Do you expect to be in a lower income tax bracket post-retirement?
  • Do you plan to spend or give the shares during your lifetime?
  • Would you benefit from early-retirement income without raising AGI too much?
  • Are you doing Roth conversions or managing IRMAA thresholds?

Planning for retirement is like landing a plane. It’s not enough to know where you’re going—you have to manage your descent. NUA gives you another lever to do it gracefully and tax-efficiently.

Recap: The NUA Playbook

Topic What to Know
What it is Appreciation on company stock inside a 401(k)
Why use it Capital gains tax treatment vs. ordinary income tax
Key requirement Lump-sum distribution after a triggering event
Taxable account management Track cost basis, time sales, or donate appreciated shares
No step-up in basis NUA portion remains taxable to heirs
Charitable planning Full FMV deduction, 30% AGI limit, must be long-term asset
Best use case Spend down in early retirement, not as a legacy asset

Want to See If NUA Is Right for You?

If you’re sitting on low-cost-basis company stock inside your 401(k), don’t let the complexity stop you from making a smart move.

In a Clarity Session, we’ll map out:

  • Whether you qualify for NUA treatment
  • How it fits into your broader tax and retirement strategy
  • When to sell, gift, or hold the stock
  • And what this means for your family, legacy, and peace of mind

This isn’t just about saving on taxes. It’s about honoring the work you’ve done—and stepping into retirement with clarity, not confusion.

Disclaimer

All written content is for information purposes only. Opinions expressed herein are solely those of Adviso Wealth, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.