Company Stock in Your 401(k) at Retirement: Three Options — and How Each Is Taxed

Most employees with significant appreciated employer stock in a 401(k) default to the IRA rollover — not because it's optimal, but because it's the path of least resistance. There's a third option — the Net Unrealized Appreciation (NUA) election — that most generalist advisors never model. For a $1M position with a $100K cost basis, choosing wrong can cost $150,000 or more in lifetime taxes. Here's what each option means for your tax bill.

Quick comparison: IRA rollover vs cash vs NUA

Option 1: Roll to an IRA (the default path)

When most employees call their 401(k) recordkeeper at retirement, the default instruction is to roll everything — including the employer stock — into a traditional IRA. No taxes are due immediately, and the account continues to grow tax-deferred.

The catch: every dollar that eventually comes out of the IRA is ordinary income. The appreciation that built up over decades — company stock bought at $8/share now worth $100/share — is taxed at ordinary income rates when it's withdrawn. In 2026, that rate reaches 37% for individuals above $640,600 in taxable income (or 35% above $256,225 for single filers).¹

Additionally, all assets in a traditional IRA are subject to Required Minimum Distributions (RMDs) starting at age 73 (or 75, if born in 1960 or later, per SECURE 2.0 § 107). Those RMDs are all ordinary income — you can't choose to take out capital gains instead, even if the underlying stock has appreciated dramatically.

When the IRA rollover makes sense despite these drawbacks

The IRA rollover is the right choice when: the employer stock has low appreciation (under 2x your cost basis), you plan to convert to a Roth IRA in early retirement while your income is temporarily low, you need the flexibility to take RMDs over time, or you're in a state that taxes capital gains and ordinary income at the same rate (California, New York, New Jersey).

Option 2: Lump-sum cash distribution

A lump-sum cash distribution — receiving everything as a cash payout rather than rolling it over — is rarely optimal for large 401(k) balances. The full value of the employer stock is taxed as ordinary income in the year of distribution, which typically pushes a retiree into the top federal bracket (37% on amounts above $640,600 single / $768,700 married filing jointly in 2026).

For a $1M employer stock position, a cash distribution could generate $300K–$400K in federal income tax in a single year — on top of potential state income taxes, IRMAA Medicare surcharges triggered by the income spike, and Social Security taxation at the 85% tier.

The only situations where a full cash-out is considered: when a pre-1936 participant is eligible for 10-year forward averaging (very narrow), when the company is distressed and stock price risk outweighs tax cost, or when the account balance is very small and the administrative complexity isn't worth it.

Option 3: The NUA election — the often-missed option

Net Unrealized Appreciation is a provision in the tax code — IRC § 402(e)(4) — that allows employees to distribute employer stock in-kind to a taxable brokerage account instead of rolling it to an IRA. The mechanics are specific:

• You pay ordinary income tax only on the cost basis — what the plan paid for the stock, often a small fraction of today's value.
• The appreciation above cost basis — the NUA — is automatically treated as long-term capital gains when you eventually sell, regardless of how long you've held the stock in your brokerage account.
• Any additional appreciation after the distribution date follows normal holding-period rules (short-term if sold within 12 months, long-term if held longer).

The NUA tax rates in 2026

The NUA appreciation layer gets long-term capital gains treatment automatically. In 2026, the federal LTCG rates are:²

• 0% for taxable income up to $49,450 (single) / $98,900 (married filing jointly)
• 15% for taxable income from $49,451 to $566,700 (single) / up to $613,700 (MFJ)
• 20% for taxable income above those thresholds
• +3.8% NIIT on top of 20% (effective 23.8%) for high earners above $200K single / $250K MFJ MAGI

Even at the worst case — 23.8% — NUA appreciation is taxed far less than the 37% ordinary income rate that would apply to the same money withdrawn from an IRA.

The estate planning bonus

If you hold NUA stock until death, the appreciation above your distribution date (additional post-NUA gains) gets a step-up in basis under IRC § 1014. Your heirs can sell the stock and pay no capital gains on that layer. The NUA layer itself doesn't get the step-up — it's an Income in Respect of a Decedent (IRD) asset — but the combination of LTCG treatment on NUA and step-up on post-distribution appreciation makes the "hold for estate" strategy compelling for positions held long-term. See the NUA estate planning guide for the full analysis.

Who should seriously consider the NUA election

The NUA election makes the most economic sense when several conditions are met simultaneously:

• High appreciation ratio. If the stock has appreciated 4x, 8x, or 20x from the plan's cost basis, the LTCG savings are large. If appreciation is under 2x, the income tax on the basis may outweigh the rate differential.
• Significant position. NUA is complex enough that the analysis, execution, and advisor fees make sense for positions over $250K–$300K. Under $100K, the dollar benefit often doesn't justify the administrative effort.
• The right plan type. Employer stock in a 401(k), profit-sharing plan, or ESOP qualifies. 403(b), 457(b), TSP, SEP IRA, and SIMPLE IRA do not. IRS Notice 2002-3 is the governing authority.³
• A qualifying triggering event. You must have a qualifying reason to distribute the entire plan — separation from service, reaching age 59½, death, or disability. Rolling out a portion whenever you feel like it doesn't qualify.
• Post-retirement income in moderate brackets. The NUA strategy is most powerful when you're in the 15% LTCG bracket in retirement — which applies to couples with taxable income up to $613,700 in 2026. High-income retirees still benefit at 23.8%, just less dramatically.

The critical rule: the lump-sum distribution requirement

The rule that trips up most NUA attempts: to qualify for NUA treatment, you must distribute the entire balance of all accounts of the same type (all 401(k) plans with that employer) in a single calendar year. You can't distribute the employer stock in December and leave the rest of the 401(k) for January — doing so breaks the single-year requirement and disqualifies NUA for both distributions.

This means the "partial rollover, partial NUA" strategy requires careful planning: you can roll the non-stock portion (bonds, index funds, cash) into an IRA in the same year as you do the in-kind NUA distribution of the employer stock. Both transactions must complete by December 31 of the triggering year.

Rolling the employer stock into an IRA — even as a single transaction, even for a day — permanently disqualifies the stock from NUA treatment. There is no way to undo an IRA rollover for NUA purposes. See NUA execution mechanics for the step-by-step process and the exact language to use with your plan administrator.

Why this decision needs a specialist

The NUA vs rollover decision involves: verifying your plan document allows in-kind stock distribution (not all do), calculating the correct cost basis (often tracked by lot across decades), modeling the distribution-year income spike against IRMAA and Social Security taxation thresholds, coordinating timing with Roth conversions, and executing the distribution in the right sequence to avoid disqualification. A generalist who defaults to "roll it all to an IRA" is leaving the most important retirement tax question on the table.

The ideal advisor has modeled NUA strategies before, understands the lump-sum requirement cold, and will run the full breakeven analysis before recommending anything. See how to find a fee-only NUA advisor — including the nine technical questions to ask before you hire anyone to guide this decision.

Sources

1. IRS — 2026 Tax Inflation Adjustments: ordinary income brackets, standard deductions. Top 37% rate begins at $640,600 single / $768,700 MFJ. OBBBA made TCJA income provisions permanent.
2. Tax Foundation — 2026 Tax Brackets: LTCG rates 0% / 15% / 20% at $49,450 / $566,700 single; $98,900 / $613,700 MFJ. Values verified for tax year 2026.
3. IRS Notice 2002-3 — Taxation of Net Unrealized Appreciation: eligible plan types (qualified plans including 401(k), profit-sharing, ESOP); excludes 403(b), governmental 457(b), IRAs, and SIMPLE plans.
4. IRC § 402(e)(4) — Net Unrealized Appreciation: statutory basis for NUA treatment, lump-sum distribution requirement, qualifying triggering events, in-kind stock distribution mechanics.
5. IRS Publication 575 — Pension and Annuity Income: NUA rules, 1099-R Box 6 reporting, and lump-sum distribution treatment for employer stock.
6. IRS Topic No. 559 — Net Investment Income Tax: 3.8% surtax on capital gains above $200K single / $250K MFJ MAGI (not inflation-adjusted under IRC § 1411(b)).

Tax values verified against IRS 2026 inflation adjustments (IRS.gov, October 2025) and Tax Foundation 2026 brackets as of May 2026. LTCG rates confirmed via IRS Rev. Proc. 2025-32. OBBBA (July 2025) made TCJA ordinary income and LTCG bracket provisions permanent. This page is for informational purposes only and does not constitute tax, legal, or investment advice. NUA is an irreversible election under IRC § 402(e)(4) — consult a qualified specialist before making any distribution decision.