NUA vs. Roth Conversion: Which Tax Strategy Saves More?

Both the NUA election and Roth conversions reduce lifetime tax on retirement savings — but they target different problems, apply in different situations, and interact with each other in ways that can compound or cancel out their benefits. This guide compares them directly and shows when each one wins.

How each strategy works

NUA election

NUA applies exclusively to highly appreciated employer stock held inside a 401(k). Instead of rolling that stock into a traditional IRA — where all future withdrawals become ordinary income — you distribute the shares in-kind to a taxable brokerage account at a qualifying event (retirement, age 59½, separation from service, death, or disability). Under IRC § 402(e)(4):

• You pay ordinary income tax on the cost basis (the plan's original purchase price per share) in the distribution year.
• The appreciation — the difference between cost basis and market value at distribution — becomes long-term capital gain when you sell the shares, taxed at 0%, 15%, or 20% rather than up to 37% ordinary income rates.¹

The election requires a lump-sum distribution of the entire plan balance in a single tax year (non-stock assets can be rolled to an IRA in the same year). Once employer stock is inside a traditional IRA, the NUA election is permanently gone — there is no way to retroactively undo a rollover.

Roth conversion

A Roth conversion moves pre-tax money from a traditional IRA or 401(k) into a Roth account. You pay ordinary income tax on the converted amount in the year of conversion. After that, the money grows tax-free and qualified withdrawals (age 59½ or older and the 5-year rule satisfied) are completely tax-free — including all future appreciation.²

Unlike NUA, Roth conversions have no qualifying event requirement. You can convert any amount at any time across as many years as you want, and the strategy applies to any pre-tax IRA or 401(k) balance — not just employer stock.

Side-by-side comparison

When NUA saves more than Roth conversion

High appreciation ratio (10:1 or greater)

The primary driver of NUA's advantage is the spread between cost basis and market value. At a 10:1 ratio ($1M value, $100K basis), 90% of the stock's value converts from ordinary-income-taxed-at-37% to LTCG-taxed-at-15%. No Roth conversion can match that arithmetic — every dollar converted pays ordinary income rates immediately, while NUA appreciation pays LTCG rates regardless of your income level.

At a 20:1 ratio, the basis is only 5% of the position's value. The ordinary income hit in the NUA year is tiny; the LTCG savings on the remaining 95% are enormous. This is where NUA dominates decisively.

Already in a high income bracket during retirement

Roth conversions are most valuable in low-income years — you're choosing to pay tax now at a low rate to avoid higher rates later. If your pension, Social Security, and other retirement income already puts you in the 24%, 32%, or 35% bracket, Roth conversions are expensive relative to the future benefit. NUA, by contrast, converts appreciation to LTCG at 15–20% regardless of your ordinary income level (until NIIT kicks in above $250K MFJ).

Large position that exceeds practical conversion bandwidth

A systematic Roth conversion strategy requires spreading conversions across many years to manage bracket exposure — typically $80K–$150K per year for someone in the middle of the retirement income stack. For someone with $800K of employer stock and a $60K basis, converting the equivalent $740K in pre-tax IRA assets to Roth would take 8–10 years at 22–32 cents per dollar. The NUA election handles the entire appreciation at once, at 15% LTCG, in a single year.

Estate step-up planning

If you intend to hold NUA stock until death, the post-distribution appreciation receives a step-up in basis under IRC § 1014. Heirs inherit the shares at date-of-death market value and owe no capital gains tax on lifetime appreciation. The cost basis portion (distributed during your lifetime) is IRD with no step-up — but for high-ratio positions, the step-up on the appreciation layer can be worth hundreds of thousands in estate tax savings. For retirees with philanthropic intent, donating NUA shares directly to a donor-advised fund avoids capital gains entirely and generates a full FMV deduction.

When Roth conversion saves more than NUA

Low appreciation ratio (under 4:1)

When cost basis is a large fraction of the stock's current value, most of the NUA distribution hits as ordinary income anyway. At 2:1, half the position is basis — taxed at ordinary rates — and only half gets LTCG treatment. In that scenario, paying 22% on a Roth conversion today and eliminating future ordinary income on growth can produce better long-term results than paying ordinary income on a 50% basis position via NUA.

Plan doesn't allow in-kind stock distribution

NUA requires the plan to support distributing employer shares in-kind to a taxable brokerage account. Plans that can only distribute cash (by liquidating stock first) don't qualify for NUA. Roth conversions have no plan document restriction and are available in any year.

High-tax state (CA, NY, NJ, OR)

California, New York, and New Jersey tax long-term capital gains as ordinary income at rates of 9–13.3%. The federal NUA advantage is real, but the state benefit is zero. Roth conversions, by contrast, produce tax-free future income in virtually all states — eliminating not just federal but also state tax on future growth. For CA/NY/NJ residents, the break-even appreciation ratio for NUA shifts significantly higher, and Roth conversions often produce a better combined federal + state result. See: NUA and state taxes.

Long time horizon with compounding tax-free growth

Roth conversions benefit from the time value of tax-free compounding. A $500K conversion at age 55 growing at 7% for 25 years reaches $2.7M — entirely tax-free. For someone without significant employer stock but with a large traditional IRA, Roth conversions in low-income pre-retirement years are the primary lifetime tax reduction tool. NUA simply doesn't apply to non-employer-stock IRA assets.

Estate: heirs in a high income bracket

Traditional IRAs are IRD — heirs pay ordinary income tax on every withdrawal, with no step-up in basis. Roth IRAs pass tax-free to non-spouse beneficiaries (subject to the 10-year rule under SECURE 2.0). If your heirs are in the 32%+ bracket, the estate tax-free treatment of Roth accounts can match or exceed the step-up benefit of NUA stock held to death for positions with moderate appreciation ratios.

Worked example: Susan, age 62, $800K employer stock position

Susan is retiring with $800K in company stock (10:1 ratio, $80K cost basis) and $700K in mutual funds in the same 401(k). She has a $55K/year pension and will claim Social Security at 67. She lives in Texas (no state income tax).

Option A: NUA election only

• Distribution year: $80K cost basis = ordinary income. Pension $55K + basis $80K = $135K AGI. MFJ standard deduction $33,100 → taxable income ~$102K. Tax on basis: ~$18,000 (22–24% bracket).
• Post-NUA stock sales: $720K appreciation sold over 5 years in early retirement before RMDs start, largely in the 15% LTCG bracket. Tax on $720K: ~$108,000.
• Mutual funds: Rolled to traditional IRA; will generate RMDs beginning at age 73.
• Total federal tax on employer stock: ~$126,000

Option B: Roll everything to IRA, convert $100K/year to Roth for 10 years

• The $800K employer stock enters the IRA. NUA opportunity permanently lost.
• Susan converts $100K/year from ages 62–72, paying ~22–24% ($22,000–$24,000 per year). Cost over 10 years: ~$220,000.
• Only $1M of the $1.5M total balance gets converted to Roth. Remaining $500K+ in traditional IRA still generates RMDs — including the former employer stock, now taxed as ordinary income when withdrawn.
• Total federal tax on what would have been NUA stock: considerably more than $126,000 (ordinary income at 22–32% on $800K, spread over many years, plus IRMAA exposure from large RMDs).

Option C: NUA election + Roth conversions in sequence (the optimal answer)

• Age 62 (NUA year): Distribute $800K employer stock in-kind; roll $700K mutual funds to IRA. Basis = $80K ordinary income, tax ~$18,000.
• Ages 63–66 (low-income window): Sell NUA stock in tranches (15% LTCG) while converting $80–100K/year from the traditional IRA to Roth. Before Social Security and RMDs, the ordinary income base is low, so conversion rates are 22%.
• Result: The $720K NUA appreciation is taxed as LTCG. A significant portion of the IRA converts to Roth at 22% before the SS + RMD income stack closes the low-rate window.
• This almost always outperforms either strategy alone.

The key insight: NUA and Roth conversions apply to different pools of money. NUA handles the employer stock (the unique LTCG opportunity). Roth conversions handle the rest of the IRA over multiple low-income years. Doing only Roth conversions and rolling the employer stock to an IRA forces you to eventually pay ordinary income on that entire stock appreciation — a permanent and expensive mistake.

Doing both: the sequencing answer

For a step-by-step guide to executing NUA and Roth conversions in tandem — including the IRMAA two-year lookback trap, bracket stacking mechanics, and the three optimal planning windows (pre-NUA, NUA year, post-NUA) — see the companion guide: NUA + Roth Conversion: Sequencing Strategy to Minimize Lifetime Tax.

The short version: the NUA distribution year is usually the worst year for a Roth conversion (the basis distribution adds to ordinary income). Pre-NUA years and post-NUA years — especially the low-income window before Social Security and RMDs begin — are typically the best Roth conversion windows.

1. IRS Rev. Proc. 2025-32 — 2026 long-term capital gains thresholds: 0% bracket ≤$49,450 single / $98,900 MFJ; 15% bracket to $550,000 single / $618,150 MFJ; 20% above those amounts. IRS.gov Rev. Proc. 2025-32
2. IRC § 402(e)(4) — Net Unrealized Appreciation rules, qualifying events, lump-sum distribution requirement, and LTCG treatment of NUA appreciation. law.cornell.edu/uscode/text/26/402
3. IRS Publication 575 (Pension and Annuity Income) — NUA mechanics, 1099-R Box 6 reporting, and Schedule D treatment of NUA gains. IRS.gov/publications/p575
4. IRS Roth IRA page — Roth conversion rules, 5-year rule, qualified distribution requirements, and TCJA elimination of Roth recharacterizations. IRS.gov/retirement-plans/roth-iras
5. SECURE 2.0 Act of 2022 (§ 107) — RMD age 73 for those born 1951–1959; age 75 for those born 1960 or later. No lifetime RMDs on Roth 401(k) accounts starting 2024 (§ 325). IRS.gov retirement-topics-RMDs

Tax values verified as of May 2026. 2026 thresholds per IRS Rev. Proc. 2025-32.