How to Execute an NUA Distribution: Step-by-Step

You've modeled the numbers, decided NUA makes sense, and now you need to actually do it. This guide covers the mechanics — what to request from your plan, how the pieces fit together, and what happens at tax time. Not a substitute for professional guidance on your specific situation.

One-shot window. The NUA election is tied to a specific qualifying event under IRC § 402(e)(4).¹ Once you roll employer stock into an IRA, NUA treatment is gone permanently. Get the mechanics right before initiating any distribution.

Before you begin: confirm eligibility

Two requirements must be met before you take a single dollar out of the plan. Miss either one and NUA is disqualified.

1. Confirm your qualifying event

The IRS requires one of four triggering events:¹

Separation from service — leaving the employer (retirement, resignation, layoff). Must be a complete separation; transfers within the same controlled group don't count.
Attainment of age 59½ — you can still be employed. If you reach 59½ while still working and the plan allows in-service distributions, this can trigger eligibility.
Disability — meeting the definition under IRC § 72(m)(7) (unable to engage in substantial gainful activity due to medically determinable impairment).
Death — for beneficiaries inheriting the plan balance.

2. Confirm no prior tainting distributions

The lump-sum distribution requirement means the entire plan balance must be distributed within a single tax year (January 1 – December 31).² Any distribution taken from this plan in a prior year (even a small hardship withdrawal or loan default) may taint eligibility — you no longer have a "first year of participation" lump-sum available for that plan year's triggering event.

Check your 1099-R history or ask HR directly: "Have I ever taken any in-service distributions from this plan?" If the answer is yes, a tax professional must assess whether NUA is still available.

Step 1 — Identify the employer stock lots and select shares

Before contacting your plan administrator, know exactly what you want to distribute in-kind.

Pull a current statement showing each lot of employer stock: shares acquired, acquisition date, and the plan's cost basis (what the plan paid per share on your behalf).
Decide whether to do full NUA or partial NUA. For partial: identify the specific lots you want distributed in-kind (typically the highest-appreciation shares). See the partial NUA strategy guide for lot-selection mechanics.
Confirm the plan supports specific-share identification for the in-kind distribution — most large plans do, but verify.

Step 2 — Open a taxable brokerage account

The employer stock must transfer to a taxable (non-IRA) brokerage account. You cannot receive the stock, put it in an IRA, and later claim NUA — the in-kind distribution must go directly to taxable.

Open the taxable account before initiating the distribution. The plan administrator will need the receiving account details.
The receiving brokerage must accept in-kind stock transfers (DTC-eligible). Most major brokers (Fidelity, Schwab, Vanguard, Merrill) accept these without issue.
Confirm the receiving brokerage's account number and DTC participant number — your plan's distribution team will ask for both.

Step 3 — Request the in-kind distribution from the plan

Contact the plan administrator or plan recordkeeper (the company that administers the 401(k), such as Fidelity NetBenefits, Vanguard at Work, or Empower).

Request a lump-sum distribution triggered by your qualifying event. Use those exact words — "lump-sum distribution" signals NUA treatment to the plan.
Specify: employer stock lots to distribute in-kind to your taxable brokerage, and the remaining balance to roll over to an IRA.
Provide the taxable brokerage account details for the stock transfer and the receiving IRA custodian details for the rollover portion.
Request that the plan document the cost basis of the distributed shares in writing — you'll need this for tax reporting. Ask specifically for the "plan cost basis" (not the market value at distribution).

Get it in writing. Confirm the distribution instructions in writing (email or plan portal). Plans occasionally default to distributing stock as cash (selling shares) or treating the entire distribution as a rollover. A written instruction trail protects you if something is processed incorrectly.

Step 4 — Complete the full distribution in the same tax year

The lump-sum requirement means:

The in-kind stock transfer to your taxable account AND the IRA rollover of the remaining balance must both be completed by December 31 of the same year.
If you initiate in November, make sure both legs clear before year-end. Plan transfers can take 2–4 weeks. Leave margin.
Do not leave any balance in the 401(k) after December 31. A partial distribution that spans two tax years generally disqualifies NUA for both years.

Step 5 — Receive and review your 1099-R

Your plan administrator will issue a Form 1099-R in January of the following year. For an NUA distribution, review each box carefully:³

Box	What it shows	What to verify
Box 1	Gross distribution — total FMV of employer stock distributed	Should match FMV of shares on distribution date
Box 2a	Taxable amount — the cost basis of the distributed shares	Must equal plan cost basis, NOT the market value. This is the amount you'll owe ordinary income tax on.
Box 6	Net unrealized appreciation in employer's securities — the NUA amount	Should equal Box 1 minus Box 2a. This is the core NUA figure — it gets LTCG treatment when you eventually sell.
Distribution code	Code 7 = normal distribution (age 59½+); Code 1 = early distribution (under 59½, penalty applies to basis portion); Code G = rollover portion	Code 7 or 1 on the in-kind stock distribution. Confirm the rollover leg shows Code G.

If Box 6 is blank and Box 1 equals Box 2a (all of gross distribution is reported as taxable), the plan may have treated the distribution as a normal taxable distribution rather than an NUA election. Contact the plan immediately — corrections to 1099-R can be made, but the distribution itself cannot be undone.

Step 6 — Tax reporting at filing time

NUA is reported on two lines of your federal return in the distribution year and again in the year of sale:

Distribution year (year of the NUA)

Form 1040, Line 5b (Pensions and annuities, taxable amount) picks up Box 2a — the cost basis amount taxed as ordinary income.
If you're under 59½ and the distribution code is 1: Form 5329, line 1 reports the additional 10% tax on the cost basis. Exceptions under IRC § 72(t) (e.g., Rule of 55, disability) are claimed on Form 5329.⁴
The NUA amount (Box 6) does NOT appear as income in the distribution year — it's deferred until sale.

Year of sale

When you sell any of the distributed employer stock, report on Schedule D / Form 8949.
Your basis in each share = the plan cost basis (the amount in Box 2a allocated to those shares).
The NUA portion (gain up to Box 6 per share) is automatically long-term capital gain regardless of how long you've held the stock after distribution.² Mark it as long-term.
Any appreciation above the distribution-date FMV (post-NUA gain) is LTCG only if you've held the stock 12+ months after distribution; otherwise short-term.

Basis tracking matters. Keep a spreadsheet showing each lot's plan cost basis, distribution-date FMV, and Box 6 NUA amount per share. The 1099-B from your brokerage will use FMV at distribution as cost basis (the brokerage doesn't know the plan cost). When you file, you'll adjust on Form 8949 to use the plan cost basis so the NUA portion correctly flows as long-term gain, not additional ordinary income.

Common mistakes that disqualify or undermine NUA

Prior-year distribution from the same plan. Even a small in-service withdrawal resets the lump-sum clock. One hardship distribution in 2019 can eliminate NUA eligibility at a 2026 retirement.
Not completing the distribution before December 31. Partial completion — stock transferred in November, IRA rollover in January — typically disqualifies the lump-sum requirement for that year.
Rolling the employer stock into an IRA first, then trying to extract it. There's no mechanism to "re-elect" NUA after stock is in an IRA. The election is made at the point of the original distribution from the employer plan.
Plan administrator processing error. Some plans default to treating employer-stock distributions as full rollovers unless you specifically instruct otherwise in writing. Always confirm instructions in writing and review the 1099-R before filing.
Missing the IRA rollover 60-day window. If the non-stock portion is issued to you as a check (indirect rollover), you have 60 days to deposit it into an IRA. Missing this turns the entire cash distribution into a taxable event. Use direct rollover to avoid the clock.

When to involve a specialist

The execution mechanics look straightforward on paper, but the interactions are easy to get wrong:

If your plan history is unclear (any prior distributions, loans, or rollovers into this plan), a specialist can review your history and confirm NUA eligibility before you initiate anything.
If you're doing a partial NUA, lot-selection optimization requires modeling your full tax picture — not just the NUA itself.
Tax reporting for NUA involves two separate tax years and an adjusted-basis calculation that most tax preparers handle incorrectly without a specialist review.
If Box 6 on your 1099-R is blank or incorrect, a specialist can help you correct it before filing and document the NUA amount.

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Sources

Distribution mechanics verified against IRC § 402(e)(4), IRS Publication 575, and IRS Topic 412. NUA is a one-shot, irreversible election — specialist review before initiating any distribution is strongly recommended.