Partial NUA Strategy: Optimizing the Employer Stock Split

NUA doesn't have to be all-or-nothing. For employees with stock accumulated over many years at varying prices, the biggest tax savings usually come from a targeted split — not NUA-ing every share.

Why partial NUA exists

When you retire with employer stock inside a 401(k), you have one chance to elect NUA treatment under IRC § 402(e)(4).¹ The mechanics: you distribute the stock in-kind to a taxable brokerage account, pay ordinary income tax on the cost basis in the year of distribution, and the unrealized appreciation becomes long-term capital gain when you eventually sell — regardless of how long you hold the shares afterward.

The key insight most people miss: you don't have to NUA all your employer shares. If your plan allows specific-share identification (most large-employer 401(k) plans do), you can choose which share lots to distribute in-kind via NUA and roll the rest into a traditional IRA.

The optimization rule: NUA where it's worth the most

The NUA benefit comes from converting what would otherwise be ordinary income tax on appreciation into long-term capital gains tax. The larger the spread between your cost basis and the current share price, the more ordinary income exposure you convert per dollar of basis you pay tax on today. This produces a clear optimization rule:

• NUA the high-appreciation lots first. Shares acquired in 2006 at $12 that are now worth $140 have an 11x appreciation ratio — those are the highest-value NUA candidates. The LTCG savings on that $128 of appreciation per share dwarfs the ordinary income tax on the $12 basis.
• Roll the low-appreciation lots. Shares acquired in 2022 at $110 that are now worth $140 have only a 1.3x ratio. NUA-ing those means paying ordinary income tax on $110 today to convert $30 of appreciation to LTCG — a poor trade. Roll those to an IRA and preserve the tax deferral.

A concrete example: the split in action

Suppose you're retiring at 62 with 8,000 shares of employer stock, all currently at $150/share ($1.2M total). You accumulated them in two waves:

Scenario A — NUA everything: Pay ordinary income tax on total basis of $375,000 (5,000 × $15 + 3,000 × $100). At a 32% marginal rate, that's $120,000 in ordinary income tax due this year. The $825,000 NUA becomes LTCG when sold (at 20%: roughly $165,000 in future tax). Total tax cost across both events: ~$285,000.

Scenario B — Optimized split: NUA only the early lot (5,000 shares, $75,000 basis, $675,000 NUA). Roll the recent lot ($450,000) into an IRA. Ordinary income tax on basis this year: $75,000 × 32% = $24,000. Future LTCG tax on the NUA when sold: $675,000 × 20% = $135,000. The IRA portion grows tax-deferred and can be Roth-converted in low-income years later. Approximate total federal tax: ~$159,000 for the NUA piece alone — versus $285,000 to NUA everything.

The difference isn't always this stark, but when your lot structure is this varied, optimizing the split saves significant money compared to a blanket election.

Mechanics: how to execute a partial NUA

1. Confirm lot-level selection is available. Contact your plan administrator and ask whether the plan allows specific-share identification for the NUA distribution. Most large plans administered by Fidelity, Vanguard, or T. Rowe Price allow this. Some older ESOP or union plans distribute shares proportionally (blended basis) — if that's your plan, partial NUA is not possible and you're choosing between NUA-all and rollover-all.
2. The lump-sum distribution requirement still applies. You must distribute the entire plan balance within one taxable year.¹ The shares you designate for NUA transfer in-kind to a taxable brokerage account; cash and fund balances roll to an IRA. Both transfers must occur in the same calendar year — you cannot split the transaction across December and January.
3. Coordinate the two simultaneous transfers. Your plan administrator handles the in-kind stock transfer to one account and the IRA rollover to another. Request written confirmation of which lots are going where before execution. A misdirected lot cannot be undone.
4. Keep the 1099-R permanently. The plan administrator will report the NUA amount in Box 6 of Form 1099-R.² This document establishes your cost basis for the distributed shares. You or your heirs will need it when the shares are eventually sold.

State tax considerations

Several states — California, New York, New Jersey, and others — tax long-term capital gains at the same rate as ordinary income. If you live in one of these states, the NUA benefit narrows materially: you still save on federal tax, but the LTCG rate advantage disappears at the state level. Residents of states with no income tax (Texas, Florida, Nevada, Washington, among others) capture the full NUA benefit.

One advanced consideration: if you are planning to relocate to a lower-tax state in retirement, the timing of when you sell the distributed shares matters. Most states base capital gains taxation on residency at time of sale, not at time of distribution. Distributing the stock while still in a high-tax state (to complete the NUA election) and then selling after establishing residency in a no-tax state can significantly reduce the total tax on the NUA gain — but this requires careful legal and tax advice specific to both states.

Estate planning with a partial NUA

When you hold NUA shares through death, the rules are nuanced:

• The NUA layer (appreciation from cost basis to distribution-date price) is Income in Respect of a Decedent (IRD) — it does not receive a step-up in basis at death. Your heirs inherit the same LTCG exposure you had.
• Any post-distribution appreciation above the distribution price does receive a step-up. If you die holding shares acquired at $15 (basis), distributed at $150 (NUA applies to this $135), and worth $200 at death, your heirs' basis is $150 for the NUA layer (IRD, no step-up) plus step-up on the $50 post-distribution gain — effectively $200 basis, eliminating the $50 of post-distribution appreciation from taxation.
• For large positions where you plan to hold indefinitely and pass to heirs, the IRA rollover may actually be preferable — heirs can use the Roth conversion ladder on inherited IRA assets over time, whereas the NUA gain is permanently embedded as IRD.

See our NUA and Estate Planning guide for a full treatment of charitable gifting, CRT strategies, and DAF use with appreciated employer stock.

Common mistakes in partial NUA planning

• No modeling, just gut feel. Advisors who recommend "NUA all of it" or "just roll it over" without running the lot-specific numbers are guessing. The right split requires explicit modeling of your basis lots, current bracket, projected future income, state of residence at sale, and estate plan.
• Forgetting the NUA year's full tax picture. In the year you execute NUA, the cost-basis amount is taxable ordinary income. If you're also receiving severance, unvested RSU payout, or pension income, the NUA cost basis may push you into the top bracket or trigger IRMAA Medicare surcharges. The tax year of execution needs a full income projection.
• Assuming lot selection is available without confirming. If you plan the optimal split and then discover the plan only allows blended-basis distribution, you're choosing between all-in NUA or rollover only. Verify in writing before the optimization work begins.
• Prior in-service distributions tainting eligibility. If you took an in-service withdrawal or hardship distribution from this plan in a prior year, the current distribution may not qualify as a lump-sum for NUA purposes. This requires a plan-specific legal analysis before you proceed.

Sources

1. IRC § 402(e)(4) — Net Unrealized Appreciation. Governs the NUA election, in-kind stock transfer, and the lump-sum distribution requirement at § 402(e)(4)(D).
2. IRS Topic 412 — Lump-Sum Distributions. Covers qualifying events, lump-sum distribution mechanics, and 1099-R Box 6 reporting for NUA amounts.
3. IRS Publication 575 — Pension and Annuity Income. NUA cost-basis tracking, IRD treatment of the NUA layer, and basis documentation requirements.
4. Kitces.com — NUA strategy analysis. Advanced treatment of partial NUA optimization, lot selection frameworks, and interaction with state taxes and estate planning.

NUA is a one-shot, irreversible election. Verified against IRC § 402(e)(4) and IRS Publication 575. The example calculations use simplified tax rates for illustration — your actual tax depends on your specific bracket, state, and filing status. Last reviewed April 2026.