NUA vs. In-Plan Roth Conversion: What Happens If You Convert Employer Stock to Roth Inside Your 401(k)

Many modern 401(k) plans now offer in-plan Roth conversion — the ability to convert pre-tax assets (including employer stock) to a designated Roth account without leaving the plan. For employees with appreciated employer stock, this raises a specific question: should I convert the stock to Roth for the tax-free growth benefit, or execute the NUA election and use the capital gains advantage? They are mutually exclusive for the same shares of stock. For a highly appreciated position, choosing the wrong path costs $100,000–$300,000 in avoidable tax.

The bottom line up front: In-plan Roth conversion of employer stock means paying ordinary income tax on the full fair market value now. NUA means paying ordinary income on only the cost basis now, and capital gains on the appreciation later. For any position with a ratio above 3:1, NUA produces dramatically lower total tax for the retiree. Roth conversion of employer stock can win for heirs with very long time horizons — but only after the retiree has paid a large upfront penalty. Run both models before touching anything.

What in-plan Roth conversion actually does

An in-plan Roth conversion (formally an "in-plan Roth rollover" under IRC § 402A(c)(4), added by ATRA 2012) lets a plan participant move pre-tax or after-tax assets from a traditional 401(k) account to a designated Roth account within the same plan. The mechanics mirror an IRA Roth conversion: the converted amount is included in ordinary income in the conversion year, and future qualified distributions from the Roth account are completely tax-free.

For non-employer-stock assets — mutual funds, bond funds, money market — in-plan Roth conversion is often a useful strategy. The question this guide addresses is specifically what happens when the asset being converted is employer stock with a low cost basis.

Once employer stock is converted to the Roth designated account, the NUA election is gone for that stock. The appreciation that would have been taxed as long-term capital gains under NUA is instead taxed as ordinary income at the time of conversion. The Roth account then holds the stock at its conversion-date fair market value as the new basis, and all future distributions are tax-free (for qualified distributions).

Quick NUA recap: why it beats a standard rollover

The NUA election (under IRC § 402(e)(4)) lets employees distribute employer stock in-kind from a qualified plan as part of a lump-sum distribution. Only the cost basis — what the plan originally paid for the shares — is taxed as ordinary income at distribution. The difference between the cost basis and the fair market value at distribution (the "net unrealized appreciation") is taxed as long-term capital gains when the stock is eventually sold, regardless of how long you hold it after distribution.

For a 10:1 position ($900K stock, $90K basis), NUA converts 90% of the tax bill from ordinary income rates (up to 37%) to long-term capital gains rates (0%, 15%, or 20% depending on your income). The lifetime federal tax savings vs. an IRA rollover typically range from $100,000 to $400,000 depending on position size and bracket.

The IRA rollover (and by extension, in-plan Roth conversion) eliminates this advantage for the appreciated shares.

The key difference: what you pay tax on, and when

Decision	What's taxed as ordinary income	What's taxed as capital gains	When
NUA election	Cost basis only (e.g., $90K on a $900K position)	NUA appreciation ($810K) at LTCG rates when sold	Ordinary income at distribution; LTCG on your schedule
In-plan Roth conversion	Full fair market value ($900K) at conversion	None — future Roth distributions are tax-free	All ordinary income in conversion year
IRA rollover	Full fair market value ($900K+) distributed from IRA over time	None	Ordinary income as distributed (deferred, but still OI)

The critical insight: in-plan Roth conversion of employer stock is identical in current-year tax cost to a lump-sum cash distribution of the full position — you pay ordinary income on everything. The only benefit over cash distribution is that future growth is tax-free. But NUA produces lower current-year tax and lower future tax (capital gains rates rather than ordinary income) while also preserving the estate step-up option.

Worked example: $900K position, 10:1 ratio

Marcus and Linda, both 62, are retiring from a large industrial manufacturer after 28 years. Marcus's 401(k) holds $900,000 of company stock with a $90,000 cost basis (10:1 appreciation ratio). Their other income in retirement: a pension paying $85,000/year. Filing MFJ; no Social Security yet.

Taxable income baseline: $85K pension − $30,000 standard deduction (2026 MFJ) = $55,000 taxable income before any employer stock decision.

Path A: NUA election

Distribution year: $90,000 cost basis added to income → taxable income $145,000. Incremental tax on $90K at 22% marginal rate: approximately $19,800.
Employer stock ($900K FMV) transferred in-kind to taxable brokerage — no tax at distribution.
Post-distribution: sell NUA stock in tranches over 5 years (~$180K/year). At $85K pension + $180K LTCG = $265K total income. NIIT applies to $15K above the $250K MFJ threshold: $570/year × 5 = $2,850. LTCG on remainder at 15%: $810K × 15% = $121,500. Total LTCG + NIIT: approximately $124,350.
Total federal tax on employer stock via NUA: ~$144,150

Path B: In-plan Roth conversion of employer stock

Conversion year: $900,000 added to taxable income → $955,000 total taxable income.
Incremental tax on $900K above the $55K baseline (2026 MFJ brackets):
  ~$42K fills remaining 12% bracket: $5,040
  ~$110K at 22%: $24,200
  ~$188K at 24%: $45,120
  ~$106K at 32%: $33,920
  ~$268K at 35%: $93,800
  ~$186K at 37%: $68,820
Total incremental federal tax: approximately $270,900
Future qualified Roth distributions: $0 federal tax (including any appreciation on the stock after conversion).
Total federal tax at conversion: ~$270,900

Summary

Path	Current-year tax hit	Future tax	Total federal
NUA election	~$19,800 (basis only)	~$124,350 LTCG (tranche sold)	~$144,150
In-plan Roth conversion	~$270,900 (full FMV)	$0 (tax-free Roth)	~$270,900
NUA advantage			~$126,750

At a 10:1 ratio, NUA saves Marcus and Linda approximately $127,000 in federal tax compared to in-plan Roth conversion of the same shares — without giving up all future growth. This gap widens as the appreciation ratio increases: a 20:1 position would show $200,000+ in NUA advantage.

When in-plan Roth conversion of employer stock can win

Despite the large upfront tax disadvantage, there are scenarios where in-plan Roth conversion of employer stock makes sense:

1. Very low appreciation ratio (under 3:1)

When the stock has barely appreciated, the NUA advantage is small. At 2:1 ($200K stock, $100K basis), the LTCG savings on the $100K NUA amount ($15,000 at 15%) are modest — the breakeven with Roth's future tax-free growth comes much sooner. Below 2:1 and NUA rarely wins at all.

2. Very long hold horizon with significant expected appreciation

Roth conversion of the $900K position costs $127K more upfront, but future growth is completely tax-free. NUA stock sold later pays LTCG on any post-distribution appreciation. If the stock doubles after distribution/conversion to $1.8M, the NUA path pays an additional $135K in LTCG (15% on $900K of new appreciation) while the Roth pays nothing. At that point the two paths roughly break even. For a 40-year-old with appreciated employer stock (unusual but possible), Roth could win over a 20+ year horizon at aggressive growth assumptions.

3. Legacy intent: heirs in the 37% bracket with no step-up benefit from NUA

NUA stock distributed to a taxable account carries an IRD (income in respect of a decedent) liability. The NUA amount does not receive a step-up at death — heirs pay ordinary income tax on it as they sell, at their marginal rates. For heirs in the 37% bracket, the NUA layer of a large position is taxed at 37% when they sell — the same as an IRA distribution. A Roth account passed to heirs (as an inherited Roth IRA under SECURE Act 10-year rule) produces no income tax for the heirs on distributions. For large estates where heirs will be high-income, the Roth legacy benefit can offset the conversion cost.

4. State with no capital gains preference

California, New York, and New Jersey residents receive no state NUA benefit — state tax applies to the NUA appreciation at ordinary income rates regardless. In these states, the federal NUA advantage (LTCG vs. OI) is partially offset by the state tax equivalence. See the NUA and state taxes guide for the breakeven calculation by state.

Outside these four scenarios, NUA wins — often by a large margin.

The partial approach: Roth-convert other assets, preserve NUA on employer stock

The most important planning point for employees with both employer stock and non-employer-stock assets in the same 401(k): you don't have to make an all-or-nothing decision.

In-plan Roth conversion of mutual funds, bond funds, or other non-employer-stock assets does not affect the NUA election for the employer stock. The lump-sum distribution requirement under IRC § 402(e)(4) applies to the full account balance in the qualifying event year — but in-plan Roth conversions of non-employer-stock assets are treated as eligible rollovers and do not taint the lump-sum requirement for the remaining employer stock (per IRS Notice 2013-74).

This means the optimal structure for many participants is:

Convert mutual funds and bonds to Roth in prior years (when income is lower and bracket room exists)
In the qualifying event year: execute the NUA lump-sum distribution of employer stock to taxable brokerage + roll remaining pre-tax plan assets to a traditional IRA
Continue doing Roth conversions from the IRA in subsequent years when bracket room allows

This separates the two strategies: Roth conversion for the diversified assets, NUA for the employer stock. The two strategies complement rather than conflict.

Common mistake: Doing an in-plan Roth conversion in Year N that includes employer stock, then trying to execute NUA on the Roth-converted shares in Year N+1. The NUA election is not available on shares already held in a Roth designated account — those shares no longer have "unrealized appreciation" in the IRC § 402(e)(4) sense. The conversion in Year N was the taxable event; the appreciation was recognized as ordinary income at that point.

Irreversibility: what you give up if you convert first

Both in-plan Roth conversion of employer stock and the NUA election involve irreversible decisions that cannot be undone.

In-plan Roth conversion of employer stock: Cannot be "re-characterized" back to pre-tax (the TCJA eliminated re-characterization of Roth conversions after 2017). Once converted, ordinary income is recognized in the conversion year — permanently. The NUA election for those shares is gone.
NUA lump-sum distribution: Once the qualifying event occurs and the lump-sum distribution is executed, the stock is out of the plan. The election is complete. The ordinary income on cost basis is recognized; the NUA appreciation is preserved as future LTCG.
IRA rollover of employer stock: Permanently eliminates NUA on the rolled shares (IRC § 402(e)(4)(B)). Cannot be reversed. See the guide for users who've already rolled to an IRA.

The decision order matters more than almost anything else in NUA planning. Executing in-plan Roth conversion of employer stock before modeling the NUA alternative is the same category of mistake as rolling employer stock to an IRA — both permanently foreclose the NUA option.

Action steps before deciding

Find out if your 401(k) plan offers in-plan Roth conversion at all. Not all plans do. If not, this trade-off is moot — the NUA decision is between NUA and IRA rollover only.
Get your cost basis from your plan recordkeeper before making any decision. The NUA math only works if you know the basis. Request lot-level basis data, especially if you've been in the plan for 20+ years. See the NUA cost basis guide.
Run both models with your actual numbers. The worked example above uses a 10:1 ratio. Your position may be higher or lower. Use the NUA vs. rollover calculator to estimate your federal NUA savings, then compare to the Roth conversion tax cost.
Model the Roth conversion of non-employer-stock assets separately. If you want Roth exposure in retirement, in-plan Roth conversion of mutual funds (not employer stock) may be the right tool — and it doesn't touch NUA eligibility.
Consult a fee-only advisor who knows both strategies. The interaction between NUA, in-plan Roth, IRMAA look-back, bracket management, and estate planning requires a full model — not a rule of thumb.

Should you convert employer stock to Roth — or use NUA?

For most highly appreciated positions, this question has a clear mathematical answer — but it requires knowing your cost basis, bracket, state tax, and estate situation. Match with a fee-only NUA specialist who will model both strategies with your actual numbers before any irreversible action is taken. Free match, no obligation.

Related guides

NUA vs. Rollover Tax Calculator — model your ratio and estimate NUA savings vs. IRA rollover
NUA Complete Guide — full mechanics, eligibility, and planning overview
NUA + Roth Conversion Sequencing — how to combine post-NUA Roth conversions from the rollover IRA
NUA Cost Basis: Finding and Verifying Your Lot-Level Data — essential before modeling any scenario
NUA and State Taxes — how state capital gains treatment changes the NUA breakeven
Already Rolled to IRA? — what to do if the NUA election is already gone
NUA and Estate Planning — IRD treatment, step-up, and charitable strategies
NUA Distribution Timing — picking the optimal year to execute the election

Sources

2026 LTCG and OI brackets per IRS Rev. Proc. 2025-32. In-plan Roth rollover rules per IRC § 402A(c)(4) and IRS Notice 2013-74. NUA rules per IRC § 402(e)(4). NIIT per IRC § 1411. Tax calculations in the worked example are estimates using 2026 MFJ bracket structure; individual results vary by income, state, and lot composition. This page does not constitute tax, financial, or legal advice — consult qualified specialists before making any distribution decision.