NUA Strategy and RMDs: How Employer Stock Distribution Reduces Required Minimum Distributions

Most NUA discussions focus on the immediate tax benefit: converting ordinary income into long-term capital gains. But there is a second, compounding advantage that receives almost no attention: by moving employer stock out of the qualified plan, NUA permanently shrinks the balance that generates mandatory taxable distributions every year for the rest of your life. For a $450K position, the RMD reduction alone can exceed $21,000 per year in avoided ordinary income — worth roughly $4,000–$7,700 annually in federal taxes depending on your bracket, compounding for 20+ years.

How RMDs work

Required Minimum Distributions are mandatory annual withdrawals from pre-tax qualified accounts — traditional 401(k) plans, traditional IRAs, SEP IRAs, SIMPLE IRAs, and most other employer plans. The IRS requires these withdrawals to ensure that tax-deferred income is eventually recognized.¹

Under the SECURE 2.0 Act (§ 107), the required beginning date for RMDs depends on your birth year:²

• Born 1951–1959: RMDs begin at age 73 (first RMD must be taken by April 1 of the following year).
• Born 1960 or later: RMDs begin at age 75.

Each year's RMD is calculated by dividing the prior December 31 account balance by a life-expectancy factor from IRS Table III (the Uniform Lifetime Table, updated in T.D. 9930):³

Source: IRS Pub. 590-B, Table III (Uniform Lifetime Table), T.D. 9930 (2022 update, unchanged for 2026). ULT used for unmarried owners and married owners whose spouse is not more than 10 years younger.

Every dollar in your pre-tax IRA or 401(k) will eventually generate an RMD — mandatory ordinary income you may not need or want in a given year. The larger the balance, the larger the forced distribution. NUA addresses this at the root.

How NUA permanently shrinks the RMD base

The NUA election moves employer stock out of the qualified plan and into a taxable brokerage account. Once in the taxable account, that stock is gone from the pre-tax system forever — it will never contribute to another RMD calculation.⁴

The mechanism is straightforward:

• Pre-NUA: Your entire 401(k) balance — stock and non-stock — is subject to future RMDs starting at age 73 or 75.
• Post-NUA: Only the IRA rollover of the non-stock portion is subject to RMDs. The employer stock in your taxable brokerage has no mandatory distribution requirements, no IRS-dictated withdrawal schedule, and no penalty for not selling.

The qualifying event that enables NUA (separation from service, age 59½, disability, or death) typically coincides with the start of retirement — the same moment when RMD planning becomes urgent. The NUA election and the RMD reduction happen simultaneously at one of the most financially consequential decision points of your life.

Worked example: Margaret

Margaret, born in 1958, retires at 68 in 2026 after 31 years with her employer. Her 401(k) holds $1.3M:

• Employer stock: $450K current value, $55K plan cost basis — roughly 8:1 appreciation ratio.
• Other 401(k) investments: $850K (diversified funds).

Under SECURE 2.0, Margaret's RMD age is 73 (born 1958). She has five years from retirement to her first RMD.

Scenario A — NUA election

• Margaret distributes $450K of employer stock in-kind to a taxable brokerage account in 2026. She pays ordinary income tax on the $55K cost basis.
• She rolls the remaining $850K to a traditional IRA.
• By end of year before her first RMD (age 72 year-end), the $850K IRA has grown at 5% for 5 years: $850K × 1.05⁵ ≈ $1,085K.
• Age 73 RMD: $1,085K ÷ 26.5 = $40,943.

Scenario B — Full rollover

• Margaret rolls the entire $1.3M (stock + non-stock) to a traditional IRA.
• By end of year before her first RMD, the $1.3M IRA has grown: $1.3M × 1.05⁵ ≈ $1,659K.
• Age 73 RMD: $1,659K ÷ 26.5 = $62,604.

The first-year difference: $21,661 less in mandatory ordinary income per year with NUA. At a 22% marginal rate, that is $4,765 per year in avoided federal income tax — just from the RMD reduction, before accounting for the NUA appreciation's LTCG-vs-ordinary-income benefit.

Illustrative projections assuming 5% annual growth on the IRA balance after RMD withdrawals. RMDs calculated using IRS ULT divisors per Pub. 590-B. Marginal rate of 22% is illustrative; actual tax depends on total income. The NUA stock in the taxable account generates LTCG only when sold — no forced recognition.

The difference grows over time because both IRA balances continue growing, and the larger rollover balance always produces a proportionally larger mandatory withdrawal. Across a 15-year retirement (ages 73–87), the cumulative RMD reduction in Margaret's case exceeds $350,000 in avoided mandatory ordinary income — roughly $77,000 in taxes at 22%, not counting secondary effects on IRMAA and Social Security taxation.

No RMDs on the taxable brokerage stock

This point is worth stating plainly: taxable brokerage accounts have no required minimum distribution rules. There is no age trigger, no IRS-mandated withdrawal schedule, and no penalty for not selling. Once the employer stock is in the taxable account:

• You sell when you choose — in years when your income is low, when you need cash, or when your tax bracket has room below a threshold.
• You donate shares to charity if you want to eliminate the gain entirely.
• You hold the shares until death if your plan is estate-based — heirs receive the post-distribution appreciation with a stepped-up basis (the NUA layer itself remains income in respect of a decedent).
• You never have to touch it if your other income is sufficient.

The word "optional" matters enormously. In the rollover scenario, that same $450K-worth of growth stays in the IRA — and every dollar of it will eventually become ordinary income via RMD, on the IRS's schedule, not yours.

The Roth 401(k) exception

Starting in 2024, SECURE 2.0 Act § 325 eliminated lifetime RMDs for Roth 401(k) and Roth 403(b) accounts.⁵ Previously, Roth 401(k) balances were subject to RMDs (unlike Roth IRAs). This change means that rolling Roth 401(k) balances directly to a Roth IRA now avoids RMDs entirely — similar in effect to NUA, but with no LTCG on the appreciation (Roth distributions are tax-free).

If your 401(k) holds a substantial Roth sub-account alongside the pre-tax employer stock, both strategies reduce the future ordinary-income RMD base. They are complementary, not competing:

• NUA on the employer stock (pre-tax with high appreciation) → to taxable account, future LTCG on sale
• Roth 401(k) rollover to Roth IRA → no RMDs, tax-free growth and distributions
• Pre-tax non-stock balance → rolls to traditional IRA, subject to RMDs starting at 73 or 75

NUA + Roth conversions: stacking the RMD reduction

After the NUA election, the remaining IRA rollover is smaller. The window between retirement and RMD age — often 5 to 7 years — is an opportunity to reduce that balance further through Roth conversions before RMDs begin.⁶

The logic: in the years before Social Security and before RMDs, many retirees have lower income than in their working years. Converting $50K–$80K of pre-tax IRA to Roth each year in that window:

• Reduces the pre-tax IRA balance that will be subject to RMDs
• Fills lower brackets with conversions taxed at 22% rather than forcing future RMDs taxed at 24–32%
• Creates a Roth pool that has no RMDs and can be left to heirs tax-free

NUA sets this up favorably: by removing $450K of employer stock from the plan, Margaret's IRA rollover is $850K instead of $1.3M. Roth conversions of $60K/year for 5 years (ages 68–72) reduce the $850K IRA to roughly $517K before RMDs begin — producing a first-year RMD of ~$19,500 rather than $40,943. The combined NUA-plus-Roth-conversion approach can reduce the mandatory RMD to roughly one-third of the no-NUA, no-conversion baseline.

Secondary effects: IRMAA and Social Security taxation

Smaller RMDs do not just mean less income tax. They also reduce two income-driven surcharges that can add $5,000–$13,000 per year in costs:

• IRMAA: Medicare Part B and Part D surcharges based on your MAGI from two years prior. An RMD reduction of $21,661/year directly lowers MAGI, potentially keeping you below an IRMAA tier threshold. See NUA and IRMAA for tier thresholds and 2026 surcharge amounts.
• Social Security taxation: RMDs count as "provisional income" for determining how much of your Social Security benefit is taxable (up to 85%). Lower RMDs mean less provisional income — potentially keeping more SS income untaxed. See NUA and Social Security Taxation for the provisional income mechanics.

Both effects compound the tax advantage of NUA beyond the direct LTCG-vs-ordinary-income analysis.

When the RMD benefit of NUA is largest

• Large employer stock concentration: If employer stock represents 35–60% of the plan balance, NUA removes a substantial fraction of the future RMD base. A $500K–$1M stock position in a $1.5M plan produces a large, immediate, and permanent reduction.
• High appreciation ratio: With a 10:1 or 20:1 ratio, the initial tax cost (ordinary income tax on the low cost basis) is a small fraction of the amount removed from the RMD base. A $1M position with $50K basis removes $1M from the RMD base at a cost of ~$11,000 in tax (22% of $50K basis) — an extremely efficient exchange.
• Long life expectancy: The RMD reduction compounds over more years. A healthy 65-year-old woman with a family history of longevity may have 25–30 RMD years. The cumulative benefit of removing $500K from the RMD base grows substantially over that horizon.
• High base income: If your RMDs would push you into the 32% or 37% bracket, the avoided ordinary income is more valuable. NUA appreciation in the taxable account is taxed at 20% (or 15% or 0%) regardless of your other income.

Sources

1. IRS: Retirement Topics — Required Minimum Distributions (RMDs). RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and other defined-contribution plans. Calculated using prior December 31 balance ÷ life expectancy factor from IRS tables.
2. IRS: Retirement Plan and IRA RMD FAQs. SECURE 2.0 Act § 107: RMD starting age is 73 for individuals born 1951–1959; 75 for individuals born 1960 or later. First RMD must be taken by April 1 following the year the required beginning age is reached; if delayed to April 1, a second RMD is due December 31 of the same year.
3. IRS Publication 590-B (2025) — Distributions from Individual Retirement Arrangements. Table III (Uniform Lifetime Table), as updated by T.D. 9930 (effective 2022): Age 73 divisor 26.5; Age 74 divisor 25.5; Age 75 divisor 24.6; Age 76 divisor 23.7; Age 78 divisor 22.0; Age 80 divisor 20.2. IRS Pub. 590-B example confirms age-75 divisor of 24.6 for 2026 calculations.
4. IRC § 402(e)(4) — Net Unrealized Appreciation. Employer securities distributed in-kind from a qualified plan are transferred to a taxable account. The taxable account is not a qualified retirement plan and is not subject to IRC § 401(a)(9) required minimum distribution rules. The RMD obligation attaches only to the IRA rollover of the non-stock portion.
5. SECURE 2.0 Act of 2022 § 325 — Eliminating RMD Requirements for Roth Accounts in Employer Plans. Effective for tax years beginning after December 31, 2023. Roth 401(k) and Roth 403(b) designated accounts no longer subject to lifetime RMDs (matching treatment of Roth IRAs under IRC § 408A(c)(5)).
6. IRS Publication 590-B — Roth IRA Conversion Rules. Pre-tax IRA balances converted to Roth IRA are recognized as ordinary income in the conversion year. Converted Roth IRA balances are not subject to RMDs during the owner's lifetime (IRC § 408A(c)(5)). Converting in low-income pre-RMD years can reduce future mandatory ordinary income distributions.

RMD rules under IRC § 401(a)(9) and IRS Publication 590-B. SECURE 2.0 RMD age changes under § 107 (ages 73 and 75 per birth year). NUA tax treatment under IRC § 402(e)(4). Uniform Lifetime Table divisors from IRS Pub. 590-B Table III (T.D. 9930, 2022, unchanged for 2026). Projections are illustrative; actual RMD amounts depend on account balance, investment return, and distribution choices. Content is for informational purposes only. Values verified May 2026.