How an Executive Used Net Unrealized Appreciation to Cut the Tax on Company Stock

How an Executive Used Net Unrealized Appreciation to Cut the Tax on Company Stock

This is an illustrative scenario, anonymized and representative of the kind of planning described below. Figures are for illustration only. Results vary and nothing here is a prediction or a guarantee.

The default move at retirement is to roll the whole 401(k) into an IRA. One form, one afternoon, done.

For someone holding decades of appreciated employer stock inside that plan, the default move can permanently convert long-term capital gains into ordinary income. Net unrealized appreciation in a 401(k) is the rule that offers an alternative, and it is one of the few planning opportunities that disappears the moment the paperwork is signed.

This representative case follows an executive who found out about it with three weeks to spare.

The Starting Picture

A manufacturing operations executive, 62, retiring after 28 years at the same company. Her 401(k) held roughly $1.4 million, of which about $600,000 was employer stock accumulated through years of matching contributions and an employee stock purchase feature inside the plan.

The plan statement showed something most participants never look at: a cost basis on that stock of about $95,000. The company had grown for most of her career, and nearly $505,000 of the position was appreciation.

Her paperwork was already prepared for a full rollover to an IRA. Nobody had flagged the stock as anything other than a line item.

What the Default Rollover Would Have Done

Money in a traditional 401(k) or IRA comes out as ordinary income. It does not matter whether the growth came from bonds, an index fund, or a stock that multiplied six times over.

Roll the employer stock into an IRA and that treatment attaches permanently. Every future withdrawal, including the $505,000 of appreciation, is taxed at ordinary rates, and the balance is subject to required minimum distributions later.

For a household in a high bracket, the difference between ordinary rates and long-term capital gains rates on half a million dollars is not a rounding error. It is the single largest number in the retirement plan.

How Net Unrealized Appreciation Works

The NUA rules allow a participant taking a lump-sum distribution to move employer securities in kind to a taxable brokerage account rather than rolling them to an IRA.

When that happens, two things get split apart. The cost basis, $95,000 in this case, is taxable as ordinary income in the distribution year. The net unrealized appreciation, the roughly $505,000 of growth, is not taxed at distribution. It is taxed as long-term capital gain when the shares are eventually sold, regardless of how long they were held after leaving the plan.

That is the whole mechanic. You pay ordinary income tax on the small number now to get capital gains treatment on the large number later.

Two details make it work or break it. The distribution must be a lump-sum distribution of the entire plan balance within a single tax year, following a triggering event such as separation from service, reaching age 59 and a half, disability, or death. And the employer securities have to come out in kind, as shares, not sold inside the plan first.

Why the Math Favored It Here

The ratio is what decides it. A $95,000 basis against $505,000 of appreciation means about 16 percent of the position is taxed as ordinary income to shelter the other 84 percent into capital gains treatment.

Flip that ratio and the answer flips too. An executive whose stock had a $400,000 basis and $200,000 of appreciation would face a large current tax bill for a smaller benefit, and a straight rollover may well be better.

The other factor was timing. She was retiring, which is a triggering event, and she had one tax year in which to complete the entire distribution. That calendar is unforgiving, and it is the reason NUA planning has to happen before the rollover form goes in, not after.

What It Cost Her

This is the part that gets left out of most explanations of the strategy.

She owed ordinary income tax on $95,000 in the year of distribution, in a year she had already received a final bonus and unused paid time off. That pushed a portion of her income into a higher bracket than she would otherwise have occupied, and it interacted with Medicare premium calculations two years out.

She also gave up tax deferral on the appreciation growing inside the plan. Money in a taxable account generates dividends that are taxed annually, which the IRA structure would have avoided.

And she still owned a $600,000 concentrated position in a single company's stock. NUA improved the tax treatment. It did nothing about the risk of holding roughly 43 percent of retirement assets in one employer, which is a separate problem that a favorable tax result can make it psychologically harder to fix.

What She Did About the Concentration

The plan was to sell down the position over several years rather than at once, coordinating the sales with other income so the capital gains landed in years she could control.

That approach has its own trade-off. Spreading the sales means holding the concentration longer, and the stock can fall while she waits. There is no version of this where the tax outcome and the risk outcome are both optimized. She chose a middle path knowingly, which is different from defaulting into one.

Why the Coordination Mattered

NUA sits at an awkward intersection. The plan administrator executes it but generally will not advise on it. The CPA sees it after the fact, on a 1099-R that is already issued. The decision has to be made by the participant, in advance, with an understanding of both the tax mechanics and the portfolio consequences.

Anthony Syracuse is a CFP professional listed on Sam's List, based in Scottsdale, Arizona, with a practice founded in 2022 and a stated focus on high net worth households. Retirement distribution decisions of this kind, where a single election is irreversible and the tax and portfolio answers point in different directions, are the sort of situation that category of practice is built around.

Anthony Syracuse has 5 verified client reviews on Sam's List as of 2026-06-26. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences, do not represent an endorsement by Sam's List, and are not indicative of future results.

Credentials on Sam's List are self-reported, and the platform notes it verifies through FINRA BrokerCheck, the CFP Board, and IRS databases where applicable. Ask any advisor how they are compensated and whether the recommendation changes their compensation, which is a particularly live question on a distribution decision that moves assets out of a plan. Confirm licensing and fit yourself, and run the NUA math with your own CPA before you file anything. You can compare advisors by specialty, location, and client reviews in the Sam's List financial advisor directory.

Frequently Asked Questions

What is net unrealized appreciation in a 401(k)? NUA is the difference between the cost basis of employer stock held in a workplace retirement plan and its market value at distribution. Under the NUA rules, the basis is taxed as ordinary income when the shares are distributed in kind, and the appreciation is taxed at long-term capital gains rates when the shares are later sold.

Who should consider the NUA strategy? It tends to favor participants whose employer stock has a low cost basis relative to its current value, since a small ordinary-income cost buys capital gains treatment on a much larger gain. It fits poorly when the basis is high, when the position is small, or when the current-year tax bill would create other problems. Run the numbers before deciding.

What are the requirements for an NUA distribution? Generally, a lump-sum distribution of the entire plan balance within one tax year, following a triggering event such as separation from service, reaching age 59 and a half, disability, or death. The employer securities must be distributed in kind rather than sold inside the plan. Missing any element usually forfeits the treatment.

Does NUA reduce my concentration risk in company stock? No. NUA is a tax election, not a diversification strategy. You still hold the same shares, and a favorable tax result can make selling feel more expensive than it is. Treat the concentration as a separate decision with its own plan and timeline.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.