NUA (Net Unrealized Appreciation) Complete Guide

An honest framework for the decisions at hand. Not tax or investment advice — your specifics matter.

What NUA does

• For employer stock inside 401(k)/ESOP at retirement: instead of rolling to IRA, you can distribute stock in-kind to a taxable brokerage account under IRC § 402(e)(4).¹
• Pay ordinary income tax only on the cost basis (what the plan paid for the shares) in the year of distribution.
• The appreciation from plan-acquisition cost to distribution date (the "NUA") becomes long-term capital gain when you eventually sell — maximum 20% federal + 3.8% Net Investment Income Tax.²
• Over $1M of employer stock with $150K basis: NUA typically saves $150-300K of lifetime tax vs rollover, depending on your bracket trajectory.

When NUA wins

• High appreciation ratio: value / basis >4:1 is the rough rule.
• High ordinary income bracket now, lower LTCG bracket expected later.
• You expect to hold the stock long-term after distribution (doesn't need to be LTCG holding period restart — it's automatic LTCG upon distribution).
• Estate-planning bonus: appreciation above cost basis gets step-up at death, potentially never taxed.

When rollover wins

• Low appreciation (value ≈ basis): rollover preserves tax deferral with no immediate tax.
• You plan to diversify within IRA (NUA keeps concentration in taxable).
• Current ordinary bracket is low; you expect LTCG rates to rise.
• You won't hold the stock — if you're selling within 5 years, NUA benefit may not materialize meaningfully.

Qualifying event + lump-sum distribution requirement

• Must have a triggering event under IRC § 402(e)(4)(D): separation from service, attainment of age 59½, disability, or death.¹
• Lump-sum distribution: the entire balance to your credit in the plan must be distributed within one taxable year. The non-stock portion can be rolled to an IRA; the employer stock transfers to a taxable account the same year.
• Failure to meet lump-sum requirement = NUA election disallowed. Partial distributions in prior years taint eligibility.
• Common mistake: taking even a small in-service distribution in a prior year (e.g., hardship withdrawal), which disqualifies NUA permanently for that plan balance.

Partial NUA strategies

• You don't have to NUA all the stock — can choose how many shares.
• Cherry-pick: highest appreciation shares get NUA treatment, lower-appreciation shares go into IRA rollover.
• Requires plan to allow specific-share identification. Most do.
• Specialist advisors model the optimal split given your specific tax rates and long-term plans.

Estate planning interaction

• The NUA gain itself is "income in respect of a decedent" (IRD) for estate purposes. It does NOT receive step-up at death — heirs inherit the same cost basis you did, and owe LTCG when they sell.³
• Any post-distribution appreciation DOES get step-up. If you distributed stock at $80 FMV ($10 basis) and die holding it at $150, heirs' basis becomes $80 (the NUA portion retains IRD treatment) plus the $70 post-distribution appreciation which resets to $150 at death.
• Practical effect: NUA preserves most of the appreciation that was already "locked in" at distribution — heirs pay LTCG on it, not your ordinary rate.
• For donors planning to hold and pass to heirs, NUA is still attractive — you convert ordinary-income exposure to LTCG exposure, and the LTCG remains forever (not stepped up) but remains LTCG regardless of future law changes.

10% early withdrawal penalty

• If you're under age 55 at separation and use NUA, the cost-basis portion is subject to 10% early-withdrawal penalty unless another IRC § 72(t) exception applies.⁴
• If 55+ at separation (the "Rule of 55"), or age 50 for qualified public safety officers: no 10% penalty on the cost basis.⁵
• Changes the cost-benefit — consider rollover instead if young and NUA triggers $50K+ in penalties.

Sources

1. IRC § 402(e)(4) — Net Unrealized Appreciation; definition of Lump-Sum Distribution in § 402(e)(4)(D).
2. IRS Topic 412 — Lump-Sum Distributions. See also IRS Notice 98-24 on NUA mechanics.
3. IRS Publication 575 — Pension and Annuity Income (NUA IRD treatment). Based on Rev. Rul. 75-125 on death-time basis treatment of NUA.
4. IRC § 72(t) — 10% Additional Tax on Early Distributions, exceptions enumerated.
5. IRC § 72(t)(2)(A)(v) — Rule of 55 and § 72(t)(10) — Qualified Public Safety Officer age-50 exception.

NUA is a one-shot, irreversible election. Tax treatment verified against IRC § 402(e)(4) and IRS Publication 575. Specialist review strongly recommended.