Net Unrealized Appreciation
How the NUA strategy taxes company stock from a 401(k), when it beats an IRA rollover, the triggering events and lump-sum rule, and a calculator.
Net unrealized appreciation calculator
How net unrealized appreciation works
If your 401(k) holds your employer's stock, you can take the shares out in kind in a lump-sum distribution after a triggering event (separation from service, reaching 59½, disability or death). You pay ordinary income tax only on the shares' cost basis now; the growth while in the plan (the net unrealized appreciation) is taxed at long-term capital gains rates when you sell, however soon. Rolling the stock into an IRA instead means every dollar is taxed as ordinary income when withdrawn.
Example: stock with a $50,000 basis worth $300,000: NUA tax is $12,000 on the basis (24%) plus $37,500 on the $250,000 gain (15%) = $49,500, versus $72,000 if rolled over and withdrawn at 24%.
Watch-outs
- The whole plan balance must be distributed within one tax year (other assets can be rolled to an IRA).
- The 10% early-distribution tax can apply to the basis if you're under 55 at separation (or 59½).
- NUA works best with a low basis and high appreciation; with a high basis, a rollover is often better.
Common questions
What is net unrealized appreciation?
The growth in employer stock while it was in your 401(k), which can be taxed at capital gains rates if you take the shares out in a lump-sum distribution.
When does NUA make sense?
When the stock's cost basis is low compared with its value.
Can I roll some of my 401(k) to an IRA and use NUA on the stock?
Yes, as long as the whole balance is distributed in the same tax year.
Sources
More retirement calculators: Medicare Plan G · Mega Backdoor Roth · Qualified Charitable Distributions · Roth Conversion
Related
General information, not financial, tax or legal advice. Check important numbers with the official source before acting on them.