Net Unrealized Appreciation (NUA) Strategy for Employer Stock in 401(k)

What is the Net Unrealized Appreciation strategy and how does it reduce taxes on 401(k) employer stock?

If your 401(k) holds appreciated employer stock, the Net Unrealized Appreciation (NUA) strategy may allow you to pay capital gains rates (0%, 15%, or 20%) on the stock's appreciation instead of ordinary income rates (up to 37%) when you distribute the shares. This can significantly reduce lifetime taxes on a large employer stock position.

The NUA strategy involves taking a lump-sum distribution of the entire 401(k) as part of a "triggering event" (typically separation from service, reaching age 59½, or total disability). Employer stock is distributed in-kind to a taxable brokerage account, while other 401(k) assets are rolled to an IRA. Only the stock's cost basis (what the employer paid for the shares originally) is taxed as ordinary income; the NUA (gain above that cost basis) is taxed at capital gains rates when eventually sold.

This strategy affects RMDs by moving assets from the 401(k) (subject to RMDs at ordinary income rates) to: (a) a taxable account (employer stock — no RMD, capital gains rates on sale) and (b) a rollover IRA (subject to IRA RMDs). The net effect on taxes depends on the size of the NUA relative to the cost basis.

Key RMD Rules

• 1Employer stock in taxable account after NUA distribution: no RMD. Tax on sale: capital gains on NUA portion.
• 2Cost basis portion: taxed as ordinary income in distribution year.
• 3Remaining 401(k) balance rolled to IRA: standard IRA RMD rules apply.
• 4Triggering events required: separation from service, death, disability, or reaching age 59½.
• 5Entire 401(k) must be distributed in a lump sum (all assets in the same tax year) to qualify for NUA treatment.

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