7 NUA Mistakes That Cost Employees $100,000+ (And How to Avoid Them)

The Net Unrealized Appreciation election is triggered by a single, irreversible action — distributing employer stock in-kind at retirement or separation. One wrong move before or during that distribution permanently eliminates the strategy. These are the seven mistakes that advisors see most often, what they actually cost, and the specific steps that prevent them.

Mistake 1: Rolling the employer stock to an IRA — even temporarily

This is the most common and most costly NUA mistake. An employee retires, calls their 401(k) recordkeeper, and says "roll everything to my IRA." The stock goes into the IRA. NUA is gone. Permanently.

Once employer stock enters an IRA, it loses NUA treatment forever. There is no unwinding this. The IRS does not grant relief, and no amended return corrects it. IRC § 402(c)(1) treats an IRA rollover as a distribution followed by a contribution — from that point on, the stock is IRA money, and all eventual distributions come out as ordinary income.¹

How to avoid it

Before initiating any distribution or rollover request, confirm in writing with your plan administrator that you are electing an in-kind distribution of employer stock to a taxable brokerage account — not a rollover. Get the distribution election forms in hand and read them. If the default option is "rollover to IRA," override it explicitly for the employer stock portion. See the step-by-step execution guide for the exact request language to use.

Mistake 2: Splitting the lump-sum distribution across two calendar years

NUA treatment requires a "lump-sum distribution" — meaning the entire balance of all accounts of the same type (all 401(k) plans, for example) with the same employer must be distributed within a single tax year: January 1 to December 31.²

Employees who retire in November sometimes think they can take the employer stock portion in December and the cash/bond portion in January. They cannot. The January distribution moves the completion of the lump-sum into the following tax year, breaking the single-year requirement and disqualifying NUA for both distributions.

How to avoid it

Plan the distribution timeline carefully and add margin. If you're separating in the fourth quarter, initiate the distribution request by early November at the latest. Confirm the expected completion date with your plan administrator in writing. If the plan cannot complete within the calendar year, consider whether a January separation followed by a same-year distribution is cleaner. An NUA specialist can help you map the timeline.

Mistake 3: Taking prior distributions that taint the plan

For a lump-sum distribution to qualify, the year of distribution must be the first year you've received a distribution from that plan after a triggering event — OR the distribution must represent the entire plan balance.² Taking any prior distribution from the same plan can break the lump-sum qualification.

Distributions that can taint eligibility include:

• Hardship withdrawals taken in a prior year from the same plan
• Loan defaults that were treated as deemed distributions
• Required Minimum Distributions taken from the plan before separating (less common, but possible for active employees over 73 at certain companies)
• In-service distributions at ages other than 59½

This is one reason why the lump-sum distribution requirement is so treacherous: decisions made years earlier — a $10,000 hardship withdrawal at 45 — can disqualify a $200K tax benefit at 62.

How to avoid it

Before initiating any distribution, pull your complete 1099-R history for the plan (available from your recordkeeper or the IRS Get Transcript tool). Ask your plan administrator specifically: "Do I have any prior distributions from this plan that might affect lump-sum distribution eligibility?" Get the answer in writing. If there's any doubt, a tax attorney or CPA with NUA experience must evaluate the situation before you move anything.

Mistake 4: Assuming the plan allows in-kind stock distributions

NUA requires that the employer stock be distributed in-kind — the actual shares transfer from the plan to a taxable brokerage account. The plan cannot liquidate the stock to cash and distribute the cash; that kills NUA treatment because there's no appreciated stock to receive LTCG treatment.³

Many 401(k) plans at large public companies readily support in-kind stock distributions. But not all plans do, and the exceptions tend to cluster where NUA opportunities are largest:

• Closely held ESOPs — most cannot distribute shares in-kind because the company isn't publicly traded. The plan must distribute cash equal to the stock value (the "put option" requirement under IRC § 409(h)). NUA treatment generally isn't available. See the ESOP NUA guide for details.
• Plans undergoing recordkeeper transitions — some plan administrators temporarily restrict in-kind distributions during platform migrations.
• Older or smaller plans — a plan document may simply not provide for in-kind stock distributions, particularly if the stock fund is treated as a unitized fund rather than direct-share ownership.

How to avoid it

Request a copy of the plan's Summary Plan Description (SPD) and ask specifically: "Does the plan allow in-kind distribution of company stock to a taxable brokerage account?" Get written confirmation. For ESOP participants, determine whether the company is publicly traded — if not, in-kind NUA distribution is likely unavailable and you should focus on whether any alternative qualifies. Do this verification 6-12 months before your planned retirement date, not the week you're filing paperwork.

Mistake 5: Not verifying cost basis before executing

The cost basis determines two things that are critical to the NUA decision: (1) how much of the distribution is taxed as ordinary income at distribution, and (2) the NUA amount itself — the "spread" that qualifies for LTCG treatment. If the basis is wrong, the tax savings estimate is wrong. If the basis is missing, you cannot accurately model the election at all.

Basis errors and gaps are more common than most employees expect:

• Plan conversions and mergers — when a company changes recordkeepers or two companies merge their plans, historical lot-level basis data often fails to migrate completely.
• ESOP-contributed shares — employer match shares in ESOPs sometimes have zero or near-zero basis (which is actually favorable for NUA), but the plan may not have communicated this to the employee clearly.
• Multiple lot complexity — employees who've held employer stock for 20-30 years often have dozens of lots at different acquisition prices. The aggregate basis the plan shows may mask significant lot-level variation that a partial NUA strategy could exploit.

Critically: the plan's records are what matter for tax purposes, not what you believe the basis should be. If the plan shows a different basis than your personal records, the plan's figure governs the 1099-R Box 6 reporting — and that's what the IRS receives.

How to avoid it

Request the lot-level basis report from your recordkeeper at least 90 days before your planned distribution date. Cross-check it against your personal records. If there are gaps or discrepancies, resolve them before initiating any distribution — not after. The 1099-R Box 6 figure is hard to contest after the fact.

Mistake 6: Ignoring the distribution-year income spike

Even when NUA is executed correctly, the distribution year creates a significant ordinary income event — the cost basis is taxable as ordinary income when the stock is distributed. For employees with large plans (or large cost bases), this spike can trigger cascading second-order costs that erode the NUA benefit if not managed in advance.

The most common second-order costs:

IRMAA surcharges (Medicare Part B and D)

IRMAA is based on your MAGI two years prior. A large distribution year at age 63 means higher Medicare premiums at 65 and 66. The first IRMAA tier (2026: $106,000 single / $212,000 MFJ) adds $736/year to Part B premiums; higher tiers compound further.⁴ For employees with large cost bases — say, $300K — this cost is real and needs to be modeled as part of the NUA analysis. See the NUA + IRMAA guide for detailed planning strategies.

Net Investment Income Tax (NIIT) on post-distribution sales

The 3.8% NIIT applies to NUA appreciation gains when the stock is sold, if your MAGI exceeds $200K single / $250K MFJ.⁵ This raises the effective federal rate on NUA gains from 20% to 23.8% for high earners. It's still much better than 37% ordinary income, but it's often left out of back-of-envelope comparisons. See the NUA + NIIT guide.

Social Security taxation

The ordinary income portion of the distribution increases your provisional income, which can push more of your Social Security benefits into taxable territory (up to 85% at higher thresholds under IRC § 86).⁶ If you're claiming Social Security the same year as the NUA distribution, the combined effect can temporarily push you into a much higher marginal rate than your nominal bracket suggests.

Roth conversion opportunity cost

The NUA distribution year is almost always the worst year to do a Roth conversion — the income spike eats any bracket space you might have used. See the NUA + Roth conversion sequencing guide.

How to avoid it

Model the distribution year's total tax picture — not just the NUA tax savings — before deciding on timing. If you have flexibility in retirement date, consider whether delaying the distribution by one year changes your IRMAA exposure, Social Security taxation, or Roth conversion window. Many NUA specialists run a multi-year tax projection that accounts for all of these interactions before recommending a distribution year.

Mistake 7: Skipping the NUA math entirely — or using the wrong inputs

NUA doesn't always win. There are situations where a standard IRA rollover produces better lifetime after-tax wealth — particularly for low-appreciation positions, residents of high-income-tax states, employees with short investment horizons, or employees who need to liquidate the stock quickly after distribution.

Employees who skip the analysis and assume "NUA always wins because my advisor told me to ask about it" are making a mistake in the other direction. And employees who run the analysis using simplistic inputs — ignoring state taxes, NIIT, IRMAA, their actual withdrawal rate in retirement — often get a misleadingly favorable NUA result.

How to avoid it

Run a full model — not a back-of-envelope calculation. Use the NUA vs Rollover Tax Calculator as a starting point, but recognize it's a directional tool. A complete analysis accounts for your state tax rules, your actual retirement income sources, IRMAA exposure, NIIT applicability, RMD reduction benefit, and the estate planning implications of holding appreciated stock vs. pre-tax IRA assets. An NUA specialist runs this before making any recommendation.

The common thread: these mistakes are all preventable

Every mistake on this list has one thing in common: it happens before the distribution. By the time the stock has been rolled to an IRA or the lump-sum has been split across years, the opportunity is gone. The solution in every case is the same — get an NUA-specialist review before you initiate any retirement distribution, preferably 6-12 months before you plan to separate.

This is especially true because the mistakes often interact. An employee who skips the math (Mistake 7) is more likely to accept a simple "roll to IRA" from a generalist (Mistake 1). An employee who doesn't pull the cost basis (Mistake 5) can't adequately model the distribution-year spike (Mistake 6). The mistakes cluster.

Sources

1. IRC § 402(c)(1) — IRA rollover treatment; once employer stock enters an IRA, NUA treatment under § 402(e)(4) is permanently unavailable. See also IRS Topic No. 412.
2. IRS Topic No. 412 — Lump-Sum Distributions: single-tax-year requirement, qualifying triggering events (separation, death, disability, age 59½), and NUA election mechanics.
3. IRS Publication 575 — Pension and Annuity Income: in-kind stock distribution requirement for NUA, 1099-R Box 6 reporting, and ESOP-specific rules.
4. SSA — Medicare Costs (2026): IRMAA Part B and Part D surcharge tiers; first-tier threshold $106,000 single / $212,000 MFJ for 2026 (SSA POMS HI 01101.020).
5. IRS Topic No. 559 — Net Investment Income Tax: 3.8% surtax on capital gains above $200K single / $250K MFJ MAGI thresholds (not inflation-adjusted).
6. IRC § 86 — Social Security benefit taxation: provisional income thresholds ($25K/$34K single, $32K/$44K MFJ) unchanged since 1983/1993 and not indexed for inflation.

NUA is a one-shot, irreversible election under IRC § 402(e)(4). Tax rules verified against IRC and IRS publications as of 2026. This page does not constitute tax or legal advice — consult a qualified specialist before making any distribution decision. IRMAA thresholds: 2026 SSA POMS HI 01101.020. NIIT thresholds: IRC § 1411(b), not inflation-adjusted.