NUA Strategy for Aerospace and Defense Employees

Long-tenure employees at Lockheed Martin, RTX (formerly Raytheon Technologies), Northrop Grumman, General Dynamics, and L3Harris are among the strongest NUA candidates in the U.S. workforce: 25–35-year careers in defense and aerospace create employer stock positions with cost basis from the 1990s and early 2000s, often producing 10:1 to 25:1 appreciation ratios. At those ratios, electing NUA instead of rolling to an IRA can save $150,000 to $350,000 in lifetime federal taxes on a $1M employer stock position. But the sector's history of major mergers creates two layers of complexity that a generalist advisor is likely to miss: determining which shares in your 401(k) are "employer securities" that qualify for NUA — particularly critical for former United Technologies/Pratt & Whitney/Sikorsky employees whose 401(k) now holds RTX, OTIS Worldwide, and Carrier Global shares — and pension income stacking, which affects how much of the NUA cost basis distribution hits the 22%–37% bracket instead of the 12% bracket assumed in a simple breakeven calculation.

Why aerospace/defense employees are strong NUA candidates

Several structural features of aerospace and defense careers produce the conditions where NUA delivers maximum value:

• Long tenure with early cost basis. Defense sector careers are unusually stable. Engineers, program managers, and production staff at Lockheed Martin, RTX, and Northrop Grumman routinely serve 25–35 years at a single employer. Employer match contributions made from 1990–2005 — when LMT traded at $15–$40, Raytheon at $20–$40, and UTC at $30–$50 — carry cost basis dramatically below current market prices. A 30-year Lockheed Martin employee may hold shares with a blended basis of $10–$20/share against LMT currently trading at $460–$500: a 23:1 to 50:1 ratio on the earliest lots.
• Employer match funded in company stock. Most major defense contractors have historically matched 401(k) contributions in company stock. Continuous contributions across 25–35 years create portfolios with low blended basis relative to current market value even after accounting for newer, higher-priced lots.
• Defined benefit pensions cover baseline living expenses. Lockheed Martin, RTX, Northrop Grumman, General Dynamics, and BAE Systems all maintain defined benefit pension plans for long-service employees. Pension income covers basic living expenses, which means NUA stock doesn't need to be liquidated in a single year. The tranche-selling strategy — selling $70,000–$90,000/year in NUA stock to target the 15% or even 0% LTCG bracket — is highly viable when a pension generates the paycheck.
• Top security clearances create concentrated position risk. Employees with active top-secret/SCI clearances face restrictions on outside investment activities and sometimes on when they can leave employment without mid-project disruption. This often means defense employees stay longer, accumulate more employer stock, and reach retirement with a more concentrated 401(k) position than equivalently paid employees in less constrained industries.
• Plan sizes favor specialist modeling. A 30-year Lockheed or RTX employee may hold $800,000–$2M in employer stock across companies created by multiple mergers, with a DB pension, NQDC deferred compensation, and a cost basis affected by exchange ratios from 1990s and 2000s transactions. Getting the NUA calculation right requires understanding which shares qualify, what the actual per-lot basis is, and how pension and NQDC income interact with the distribution year's bracket math.

Major aerospace/defense employer 401(k) plans

Plan structures, recordkeepers, and match policies change. Verify with your plan's current Summary Plan Description or HR benefits portal before making any distribution decisions.

The RTX/UTC 2020 separation: which shares qualify for NUA

The most complex NUA qualification issue in aerospace involves former United Technologies Corporation (UTC) employees — including Pratt & Whitney, Sikorsky, Collins Aerospace (formerly UTC Aerospace Systems), and UTC Climate, Controls & Security staff. On April 3, 2020, UTC simultaneously executed two transactions:

1. Spun off Otis Worldwide Corporation (OTIS) — distributed one share of OTIS for each share of UTC held.
2. Spun off Carrier Global Corporation (CARR) — distributed one share of CARR for each share of UTC held.
3. Renamed the remaining company Raytheon Technologies Corporation (RTX) after merging with Raytheon Company. Legacy Raytheon shareholders exchanged each Raytheon share for 2.3348 RTX shares.

For UTC 401(k) participants, this means their plan account now holds three separate stock positions: RTX, OTIS, and CARR — even though OTIS is an elevator company and CARR is an HVAC company with no connection to the aerospace and defense work of current RTX employees.

What this means for the lump-sum distribution requirement

The lump-sum distribution requirement under IRC § 402(e)(4) requires distributing the entire balance of all plans of the same type (all 401(k) plans of the employer) in a single tax year. The requirement is that the entire plan balance be distributed — not that all assets must qualify for NUA. So your lump-sum distribution can look like this:

• RTX shares: transferred in-kind to your taxable brokerage account → NUA election applies
• OTIS shares: liquidated and proceeds rolled to IRA, OR transferred in-kind to a traditional IRA
• CARR shares: same as OTIS — rollover to IRA
• Diversified funds (index funds, bond funds, etc.): rolled to traditional IRA

All of these happen in the same tax year. Only the RTX in-kind transfer triggers the NUA election. The OTIS and CARR transfers to an IRA are tax-deferred rollovers with no current tax consequence. The lump-sum requirement is satisfied as long as all assets leave the plan in the same tax year.²

UTC employee basis allocation — what was split in 2020

When UTC distributed OTIS and CARR in April 2020, the original UTC cost basis for each lot was allocated among the three resulting positions (OTIS, CARR, and RTX) in proportion to their respective fair market values on the distribution date under IRC § 355 rules. On April 3, 2020 (an unusually volatile market period during the COVID downturn):

• OTIS opened at approximately $55–$58/share
• CARR opened at approximately $13–$15/share
• RTX traded at approximately $51–$55/share (post-separation)

For an employee with $90/share of UTC basis (reflecting contributions made around 2000–2005 when UTC traded at $70–$95), the approximate 2020 basis allocation per the three companies' relative opening market prices was:

Illustrative only — actual basis allocation depends on exact prices used by the plan recordkeeper and the specific lot's original acquisition date and cost. Request a lot-level basis report from Fidelity Workplace Investing that reflects the April 2020 spin-off allocations.

The important implication: the $40.50/share allocated to OTIS is gone for NUA purposes — that basis went with the shares that are now non-employer stock. Only the $38.70/share RTX allocation remains relevant for the NUA calculation on RTX shares. With RTX currently trading around $120–$135, that $38.70 basis gives a 3:1 to 3.5:1 ratio on contributions from the 2000s — lower than you might expect. However, contributions from the 1990s at much lower UTC prices will have proportionally lower RTX basis allocations and higher ratios.

Legacy Raytheon Company employees (pre-2020 Raytheon)

Former Raytheon Company shareholders who received RTX shares at the 2.3348 exchange ratio face a different basis calculation. If a long-tenure Raytheon employee accumulated Raytheon shares in the 1990s at an average cost of $25/share (Raytheon traded at $15–$35 through much of the 1990s), their RTX basis is:

$25 (Raytheon basis) ÷ 2.3348 (exchange ratio) = approximately $10.71/RTX share

With RTX at $125–$135, that $10.71 basis represents an 11.7:1 to 12.6:1 ratio — squarely in the range where NUA saves $100K+ in lifetime taxes. Legacy Raytheon employees with 1990s-era contributions are often better-positioned for NUA than their UTC counterparts whose 2020 basis was split across three companies.

Other merger basis chains

Lockheed Martin — Lockheed/Martin Marietta merger (March 1995)

Lockheed Corporation and Martin Marietta Corporation merged in March 1995 to form Lockheed Martin Corporation. Former Lockheed shareholders received LMT shares at the merger exchange ratio; former Martin Marietta shareholders received LMT at a separate ratio. Employees who accumulated Lockheed (LK) or Martin Marietta (ML) stock in their savings plans in the early 1990s — when Lockheed traded at $30–$60 and Martin Marietta at $50–$75 — now hold LMT shares with basis reflecting those exchange ratio adjustments. LMT currently trades at $460–$500, giving these employees appreciation ratios of 7:1 to 15:1 depending on their specific accumulation history.

Lockheed Martin's plan is administered by Alight Solutions (formerly Hewitt Associates/Aon Hewitt). See Alight Solutions NUA Distribution Mechanics for the specific process — Alight has no retail brokerage, so in-kind shares must be transferred externally via DTC to your taxable account at Fidelity, Schwab, or another broker.

Northrop Grumman — Northrop/Grumman (1994), Newport News (2001), TRW (2002)

Northrop Corporation merged with Grumman Corporation in April 1994, retaining the Northrop Grumman name. Employees of both companies received shares in the combined entity at their respective exchange ratios. Grumman was a Long Island-based defense manufacturer; Northrop was California-based. The combined company then acquired Newport News Shipbuilding (2001) and TRW's aerospace and defense business (2002), bringing further merger basis chains from those transactions.

A Northrop Grumman employee who accumulated shares in the late 1990s at $30–$50/share now holds NOC trading at $460–$480, representing a 9:1 to 16:1 ratio on that era's contributions. The plan is administered by Fidelity. Note that NOC employees in California (El Segundo headquarters, Redondo Beach, Palmdale) face the California no-LTCG-advantage problem — see the state tax section below.

L3Harris Technologies — L3/Harris merger (June 2019)

L3 Technologies and Harris Corporation completed their merger in June 2019 to form L3Harris Technologies. Harris shareholders received LHX shares at a 1:1 ratio; L3 shareholders received LHX at an exchange ratio of approximately 1.30 LHX per L3 share. Employees who accumulated legacy Harris (HRS) or L3 (LLL) shares in their plans carry basis derived from those pre-merger prices. Harris traded at $100–$150 in the years before the merger; legacy Harris basis converted 1:1 into LHX. L3 traded at $150–$200 before the merger; legacy L3 basis was divided by ~1.30 per LHX share. LHX currently trades at $210–$240, giving 2019-era contributions relatively modest ratios — but employees with 1990s and early 2000s basis (when legacy Harris or L3 traded at $30–$60) have much higher ratios.

Pension and NQDC income stacking

Aerospace and defense employers are among the last major industries to maintain generous defined benefit pension plans for long-service employees. This creates the same bracket-floor challenge seen in manufacturing and utility sector employees.

Pension income fills lower brackets before cost basis distribution

If your DB pension generates $50,000–$80,000/year in ordinary income — typical for 30-year employees at Lockheed, RTX, or Northrop Grumman — that income fills the 10%–22% brackets before the NUA cost basis distribution even begins. A 63-year-old Lockheed employee (MFJ) in Bethesda, Maryland with a $64,000 annual pension and a $75,000 NUA cost basis sees $139,000 in combined ordinary income in the distribution year. After the $30,000 MFJ standard deduction, the taxable ordinary income is $109,000 — into the 22% bracket, not the 10% bracket assumed if you start modeling without pension income.³

The silver lining: pension-funded tranche selling

Because the pension covers baseline expenses, you are not compelled to sell NUA stock in a single high-income year. RTX, LMT, NOC, or GD shares distributed in-kind sit in your taxable brokerage account and can be sold over 10–20 years. A 63-year-old who delays Social Security to 70 has a 7-year window where ordinary income consists only of the pension — $50,000–$70,000/year. In that window, annual NUA stock sales of $30,000–$50,000 can fit within the 0% or 15% LTCG bracket (2026 thresholds: 15% bracket ends at $613,700 MFJ; 0% bracket ends at $98,900 MFJ).

NQDC for defense sector executives and senior staff

Senior engineers with clearances at the GS-equivalent senior level and defense company executives often accumulate NQDC through long-term performance plans. IRC § 409A requires fixed distribution schedules that cannot be changed less than 12 months before payment. If a NQDC payout is scheduled in the same year as the NUA lump-sum distribution, the combined ordinary income (NQDC + NUA basis + pension) can push the effective bracket well into the 32%–37% range, significantly reducing the net NUA savings compared to a year with only pension income. See NUA + Nonqualified Deferred Compensation for sequencing strategies.

Security clearance employment continuity

Employees with active top-secret/SCI clearances face practical constraints on when they can separate from service. Leaving mid-program can affect clearance renewal for future employment. Many defense employees plan to retire at a project milestone — program delivery, a system acceptance test, or a contract period transition — rather than at a calendar-optimal moment for NUA.

This affects NUA planning in two ways:

• The qualifying event year may not be income-optimal. If your separation is tied to a program schedule, you may retire in a year when you have substantial NQDC payouts, a partial-year salary, or overlapping income sources already locked in. The distribution-year ordinary income may be higher than a retirement planned 12–18 months earlier for income optimization. See NUA Distribution Timing for how to work with a constrained retirement date.
• Post-separation contractor arrangements. Many defense employees immediately re-engage as independent contractors or consultants after retiring — consulting on the same programs they led, often with the same security clearance. If you re-engage as a 1099 consultant, this self-employment income in your first retirement year adds to the ordinary income stacking problem. It doesn't disqualify NUA (separation from service is still a qualifying event), but it may push the NUA cost basis distribution into a higher bracket.

State tax considerations for aerospace/defense employees

Aerospace and defense employment is heavily concentrated in a mix of high-tax and no-tax states, creating significant variation in the after-state-tax NUA benefit.

The federal NUA spread (15%–37% differential between LTCG and ordinary income rates) drives the bulk of savings regardless of state. The exception is California: at 13.3% state tax on capital gains for higher-income retirees, the combined effective rate on NUA appreciation (federal LTCG 20% + NIIT 3.8% + CA 13.3% = 37.1%) approaches the federal ordinary income rate. For California-based Northrop or Lockheed employees, the NUA benefit is narrower and depends heavily on the ratio. A 15:1 ratio still saves meaningfully; a 4:1 ratio in California may save very little. See NUA and State Taxes for the full state-by-state analysis.

Worked example: 30-year Pratt & Whitney / RTX employee

Maria, age 62, is retiring in fall 2026 after 30 years as a propulsion systems engineer at Pratt & Whitney in East Hartford, Connecticut. Her RTX Savings Plan (administered by Fidelity) contains:

She also receives a UTC legacy defined benefit pension of $52,000/year. She files MFJ; her husband has a $28,000 Social Security benefit (he is 66 and claimed early). She lives in Connecticut (no special LTCG rate). She plans to delay her own Social Security to age 70 (estimated $46,000/year).

Distribution year income (2026 retirement year)

RTX NUA: NUA appreciation treatment

The $481,000 RTX appreciation ($520,000 FMV − $39,000 basis) is distributed in-kind to Maria's taxable brokerage account. It becomes long-term capital gain when sold — at rates of 0%/15%/20% depending on total income in each sale year, not the 22%–37% ordinary income rate that would apply if rolled to an IRA.

Lifetime federal tax comparison

Illustration only. Connecticut taxes both ordinary income and LTCG at the same rate, so there is no additional state-level NUA spread — the savings are entirely at the federal level. Actual results depend on annual bracket in each sale year, IRMAA exposure, RTX growth, Social Security timing, and IRA RMD amounts. Verified against 2026 tax rates per IRS Rev. Proc. 2025-32.

When NUA wins for aerospace/defense employees

• Legacy Raytheon Company shares with 1990s basis and the 2.3348 exchange ratio. Former Raytheon employees who accumulated shares at $15–$35/share in the 1990s now hold RTX shares with basis of roughly $6.40–$15/share (after exchange ratio adjustment). At RTX $125–$135, ratios of 9:1 to 21:1 make NUA highly advantageous.
• Lockheed Martin employees with 1995–2005 LMT accumulation. LMT shares accumulated in the first decade post-merger at $15–$40/share now trade at $460–$500 — ratios of 11:1 to 30:1. At those ratios, converting the appreciation from 22%–37% ordinary income to 15%–20% LTCG saves $100K–$250K in federal lifetime taxes even in states that treat LTCG as ordinary income.
• Pension-funded tranche selling over 10–15 years. Defense retirees with DB pensions covering basic expenses can sell NUA stock in $60,000–$90,000 tranches annually, staying within the 15% LTCG bracket for most or all of the appreciation. This strategy is most effective in the pre-Social Security window (ages 62–70) when ordinary income consists only of the pension.
• Texas, Florida, and Washington residents. Lockheed employees in Fort Worth, L3Harris employees in Melbourne, and Boeing employees in Puget Sound capture the full federal LTCG spread with no state income tax overlay. At 15:1 or better ratios, total savings (federal only, no state offset) are maximized.
• Very large positions with estate planning angle. Defense sector executives who accumulate $1.5M–$3M in LMT, RTX, or NOC stock over 30+ years can use the estate step-up on post-distribution appreciation to eliminate capital gains for heirs. Only the NUA layer itself is IRD. With the $15M OBBBA estate exemption, most defense retirees will never owe estate tax — making the estate step-up on post-distribution appreciation essentially free of additional cost.⁴

When NUA doesn't help aerospace/defense employees

• UTC employees with 2000s basis divided across RTX, OTIS, and CARR. For employees who accumulated the bulk of their UTC employer stock after 2000 at prices of $70–$95/share, the 2020 basis allocation assigned roughly 43% of that basis to RTX shares. With RTX at $125–$135, that produces a 3:1 to 3.5:1 ratio on those lots — below the range where NUA saves meaningfully. The breakeven for a 22% bracket taxpayer is approximately 2.5:1 to 3:1; for a 37% bracket taxpayer, it's lower. If your blended RTX basis ratio is below 4:1, run the full math before assuming NUA is beneficial.
• California-based Northrop Grumman or Lockheed employees. CA taxes capital gains as ordinary income at up to 13.3%. For higher-income retirees in California, the combined federal LTCG + NIIT + CA state rate approaches or matches the combined federal OI + CA rate, especially at lower appreciation ratios. Model the combined rates explicitly. See NUA and State Taxes.
• Low appreciation ratio on RTX shares post-UTC-split. Even with 30 years of service, if your employer stock contributions were concentrated after 2005 (at UTC prices of $60–$80+), the RTX-allocated basis will likely produce a 2:1 to 4:1 ratio after the split — marginal for NUA. Contribution history timing matters more than years of service.
• Plan document prohibits in-kind stock distribution. Some subsidiary plans may have plan document provisions limiting or prohibiting in-kind distribution. Request the Summary Plan Description or confirmation in writing from the plan administrator before proceeding with NUA planning.
• NQDC overlaps with any available distribution year. Senior defense executives with § 409A NQDC scheduled for payout may face a narrow window where the distribution year income (NQDC + pension + NUA basis) hits the 35%–37% bracket — significantly eroding savings compared to a standalone analysis. Sequencing NQDC outside the NUA year is often possible with advance planning; without it, NUA may be less advantageous than expected.

Questions to ask your plan administrator

1. Does my plan allow in-kind distribution of employer stock — specifically, actual shares transferred to a taxable brokerage account rather than liquidated proceeds?
2. For RTX plan participants: how is my lot-level basis allocated among RTX, OTIS, and CARR after the April 2020 transactions? Does the plan show separate basis per company from the § 355 spin-off events?
3. If I hold OTIS and CARR shares received in the UTC spin-off, can those shares be transferred in-kind to a traditional IRA (rather than sold) as part of the lump-sum distribution?
4. For LMT/NOC plan participants: what merger exchange ratios were applied to convert legacy Lockheed, Martin Marietta, Northrop, or Grumman basis into the current shares? Has the recordkeeper preserved per-lot basis data dating to those transactions?
5. What is my lot-level cost basis report for all employer stock positions, and can you confirm the basis is correctly adjusted for any merger, spin-off, or exchange ratio events?
6. What is the process and timeline for an in-kind stock transfer as part of a lump-sum distribution, and what is the December 31 same-year deadline risk?
7. Will the plan issue a 1099-R with Box 6 correctly reflecting the NUA amount (employer stock FMV minus plan cost basis)?

Sources

1. IRC § 402(e)(4) — Net Unrealized Appreciation; Employer Securities Definition. "Employer securities" means stock of the employer corporation or of a member of the same controlled group of corporations within the meaning of § 1563(a). OTIS Worldwide and Carrier Global are not members of RTX's § 1563 controlled group following their April 2020 separation; only RTX stock qualifies as employer securities for RTX subsidiary employees.
2. IRS Publication 575 — Pension and Annuity Income. Lump-sum distribution mechanics and NUA rules. The lump-sum distribution requirement means all plan assets must be distributed in a single tax year; assets not qualifying for NUA (non-employer stock, non-qualifying stock) may be rolled over to an IRA in the same transaction. NUA applies only to the in-kind employer stock distribution.
3. Tax Foundation: 2026 Federal Tax Brackets. MFJ taxable income brackets: 22% begins at $96,950; 24% at $206,700; 32% at $394,600. Standard deduction $30,000 MFJ. Pension income and NUA cost basis distributions are ordinary income stacking within these brackets.
4. IRC § 1014 and § 1014(c) — Basis at Death and IRD Exception. Post-distribution appreciation in NUA stock receives a stepped-up basis at the stockholder's death; the NUA amount itself is income in respect of a decedent (IRD) and does not receive a step-up. Estate exemption permanently set at $15M per OBBBA (July 2025).
5. IRC § 355 — Tax-Free Corporate Spin-offs. Governs basis allocation when a controlled corporation distributes stock of a subsidiary. Requires that original cost basis be allocated between the distributing corporation (UTC/RTX) and the distributed corporation (OTIS, CARR) based on their respective fair market values immediately after the distribution. UTC's April 2020 spin-offs of OTIS and CARR were structured as § 355 distributions.
6. IRS Rev. Proc. 2025-32 — 2026 Inflation Adjustments. 2026 LTCG rate thresholds: 0% for taxable income ≤ $98,900 MFJ / $49,450 single; 15% up to $613,700 MFJ / $545,500 single; 20% above. NIIT 3.8% on net investment income above $250,000 MFJ / $200,000 single. Standard deduction $30,000 MFJ. Values verified July 2026.

Tax rates verified against IRS Rev. Proc. 2025-32 and IRC current through OBBBA (July 2025). Plan details (recordkeepers, match policies, pension eligibility, in-kind distribution rules) are illustrative of major employer plan structures as of 2026 but can change — verify with your plan's current Summary Plan Description or HR benefits portal. The RTX qualification analysis (OTIS/CARR eligibility) is based on IRC § 402(e)(4) controlled group rules and represents general principles; consult a tax advisor for your specific plan. Content is for informational purposes only. Values verified July 2026.