Net Unrealized Appreciation (NUA): How Company Stock in Your 401(k) Can Be Taxed
For many longtime employees, a 401(k) eventually becomes one of their largest financial assets.
But sometimes there is another layer hiding inside the account:
company stock.
We see this with longtime employees of companies such as Lockheed Martin, where decades of saving, employer contributions, and investment growth can result in substantial company-stock positions inside a retirement plan.
And that creates an important decision when retirement approaches.
Before automatically rolling your entire 401(k) into an IRA, it may be worth evaluating a tax strategy called Net Unrealized Appreciation, or NUA.
Why?
Because under certain circumstances, NUA can allow some of the growth in your company stock to eventually be taxed at long-term capital gains rates instead of ordinary income tax rates.
The difference can be significant.
But this is also a strategy where the order of operations matters.
Once company stock is rolled into an IRA, you generally cannot go back later and recreate the NUA opportunity. That's why we believe NUA should be evaluated before completing a 401(k) rollover.
What Is Net Unrealized Appreciation?
Net Unrealized Appreciation is essentially the difference between:
what the company stock originally cost inside your retirement plan
and
what those shares are worth today.
Imagine you've accumulated:
- $500,000 of company stock inside your 401(k)
- Original cost basis: $100,000
- Current value: $500,000
Your Net Unrealized Appreciation is:
$400,000.
Normally, if the entire $500,000 were rolled into a traditional IRA, future withdrawals would generally be taxed as ordinary income.
NUA potentially changes the tax treatment.
With a properly structured qualifying NUA distribution, the company shares can instead be transferred in-kind into a taxable brokerage account.
Generally, the $100,000 cost basis becomes taxable as ordinary income in the year of distribution.
But the $400,000 of NUA is not taxed until the shares are eventually sold — and that NUA can qualify for long-term capital-gains treatment.
That difference is what makes the strategy worth evaluating.
A Simple NUA Tax Example
Consider a longtime employee approaching retirement with:
$2 million in their 401(k)
including:
$500,000 of company stock
Assume the $500,000 company-stock position has a cost basis of only $100,000.
That means there is approximately:
$400,000 of Net Unrealized Appreciation.
Now let's simplify the tax situation and assume this retiree would otherwise pay a 22% federal ordinary-income tax rate on IRA distributions and a 15% federal long-term capital-gains rate.
Option 1: Roll The Company Stock Into An IRA
If the $500,000 eventually comes out of the IRA and is taxed at 22%:
$500,000 × 22% = $110,000
of federal income tax.
Option 2: Evaluate NUA
Using our simplified assumptions:
$100,000 cost basis × 22% = $22,000
Then, when the stock is sold:
$400,000 NUA × 15% = $60,000
That produces approximately:
$82,000 of federal tax
versus:
$110,000 under the IRA example.
That's a difference of approximately $28,000.
This is intentionally simplified. Actual results depend on when the stock is distributed and sold, future tax rates, additional appreciation after distribution, Medicare premiums, the Net Investment Income Tax, state taxes, charitable giving, and the rest of your income.
But it illustrates why NUA deserves consideration.
The tax treatment of a large company-stock position can potentially change depending on what you do before rolling over the 401(k).
NUA Isn't Automatically Better
This is important.
We don't look at someone with company stock and automatically say:
"You should use NUA."
Instead, the question is:
"Is NUA actually better within your overall retirement plan?"
Sometimes it is.
Sometimes it isn't.
The analysis may include:
- Your cost basis in the company stock
- Current and expected future tax brackets
- How much company stock you own
- Other assets and income sources
- Pension income
- Social Security
- Future Required Minimum Distributions
- Roth conversion opportunities
- Medicare IRMAA thresholds
- Charitable intentions
- Estate planning
- Liquidity needs
- Concentration risk
That's why we view NUA as a retirement and tax-planning decision, not simply an investment decision.
For longtime employees approaching retirement, it should be evaluated alongside the other decisions discussed in our article on Lockheed Martin retirement planning.
The Biggest NUA Mistake May Happen Before Retirement Even Begins
Imagine you've worked for the same company for 35 years.
You retire.
You call your 401(k) provider and say:
"I'd like to roll my account into an IRA."
The entire account gets transferred.
Simple.
Except there was $500,000 of highly appreciated company stock sitting inside the plan.
That rollover may have eliminated an NUA opportunity you should have evaluated beforehand.
That's why one of the first things we want to understand before moving a longtime employee's 401(k) is exactly what is inside the account.
Don't assume every dollar in a 401(k) should be treated identically.
This is particularly relevant for the longtime engineers, program managers, technical leaders, and executives we work with through our financial planning for Aerospace & Defense professionals in Dallas-Fort Worth.
NUA Doesn't Mean You Have To Keep Holding The Stock
This is another important misconception.
Using NUA does not necessarily mean:
"I should keep my company stock forever."
Quite the opposite.
Longtime employees may already have significant financial exposure to their employer through decades of salary, benefits, retirement savings, pensions, and company stock.
Once the company shares are distributed to a taxable brokerage account, we can build a strategy for what happens next.
That might involve:
- Selling shares gradually
- Diversifying the position
- Building your mid-term investment account
- Funding retirement spending
- Coordinating sales with Roth conversions
- Managing Medicare IRMAA thresholds
- Funding large retirement goals
- Donating appreciated shares to charity
The goal isn't preserving the stock position.
The goal is determining the most useful role those dollars can play in the rest of your financial life.
This is similar to how we think about other forms of equity in how stock compensation changes financial planning: company stock is ultimately a financial resource that should support the broader plan.
NUA And Roth Conversions Can Work Together
NUA shouldn't be evaluated in isolation from the rest of your tax strategy.
Suppose you retire at 62 after a long career.
Your salary disappears.
You may have a pension, but perhaps you haven't started Social Security yet. Required Minimum Distributions are still years away.
That can create an important tax-planning window.
You might simultaneously be evaluating:
What company stock should receive NUA treatment?
and
How much of the remaining pre-tax retirement account should eventually be converted to Roth?
Those decisions affect one another.
For example, recognizing the cost basis of company stock as ordinary income can affect how much room remains in a particular tax bracket that year.
Likewise, future company-stock sales could affect capital gains, Medicare premiums, and other tax-planning decisions.
That's why Roth conversions and NUA should be modeled as pieces of the same lifetime tax plan rather than independent strategies.
Charitable Giving Can Create Another Opportunity
Suppose the company stock moves into a taxable brokerage account and you are already charitably inclined.
Now you potentially have appreciated securities that can be incorporated into your charitable strategy.
Rather than automatically selling every share and then donating cash, some households may consider donating appreciated securities directly to a qualified charity or donor-advised fund.
Depending on the situation, this may help:
- Reduce a concentrated stock position
- Avoid realizing certain capital gains
- Support charitable goals
- Potentially create a charitable deduction
Again, the point isn't that every NUA strategy should eventually involve charitable giving.
It's that moving company stock into the taxable portion of the financial plan can create planning flexibility that wouldn't exist in exactly the same way if every dollar remained inside a traditional IRA.
Why The Mid-Term Account Becomes Important
After executing an NUA strategy and determining how much company stock should ultimately be sold, those dollars need somewhere to go.
For many of our clients, that becomes the mid-term investment account.
We think of this as the bridge between:
cash today
and
retirement accounts designed primarily for later.
That brokerage account can eventually help fund:
- Travel
- Home projects
- Family support
- Major purchases
- Charitable giving
- Retirement spending
- Unexpected opportunities
It's one reason we believe brokerage accounts can be particularly important for high earners.
The goal isn't moving company stock from one account simply to let it sit somewhere else.
The goal is turning decades of accumulation into assets that support the life you've built them for.
NUA Can Be Especially Relevant For Longtime Lockheed Martin Employees
This is one reason NUA comes up in our work with longtime Lockheed Martin employees.
Someone may arrive at retirement after 30, 35, or even 40+ years with:
- A substantial 401(k)
- Meaningful company stock
- A pension
- Social Security approaching
- A mostly paid-off home
- Decades of accumulated benefits
They've done an excellent job accumulating wealth.
The challenge now is coordinating it.
A $2 million 401(k) isn't simply "$2 million for retirement."
There may be several different planning decisions hiding inside it.
Some assets may eventually belong in an IRA.
Some may present Roth conversion opportunities.
Some company stock may deserve an NUA analysis.
Some assets may eventually help create retirement income.
And the pension and Social Security decisions have to fit around all of it.
That's why our broader approach to financial planning for Lockheed Martin employees in Dallas-Fort Worth focuses on coordinating benefits rather than looking at each account independently.
What Happens After The 401(k)?
Ultimately, NUA is one decision within a much larger transition.
For decades, you've been accumulating.
Then retirement arrives and the question changes from:
"How much can I save?"
to:
"How do I actually use everything I've built?"
Your pension may provide part of your spending.
Social Security may provide another piece.
Your taxable investments may provide flexibility.
Your IRA may eventually create taxable income and RMDs.
Your Roth assets may provide another source of tax-free retirement dollars.
The objective is getting all of those pieces working together.
That's the same philosophy behind our approach to retirement income planning: the account itself isn't the plan. It's one resource used to create the retirement paycheck and lifestyle you actually want.
The Bottom Line
Net Unrealized Appreciation can be a powerful tax-planning strategy for employees who have accumulated highly appreciated company stock inside a 401(k).
But the most important takeaway isn't:
"Everyone should use NUA."
It's:
Before rolling company stock from your 401(k) into an IRA, determine whether NUA is worth using.
Once the rollover occurs, you generally can't simply undo it later because you discovered the strategy would have been beneficial.
For someone with hundreds of thousands of dollars of appreciated employer stock, that analysis can potentially affect tens of thousands of dollars—or more—of lifetime taxes.
The best answer requires looking beyond the stock itself and coordinating the decision with your retirement income, future tax brackets, Roth conversions, Medicare planning, charitable goals, investment strategy, and the life you want your retirement assets to support.
Related Resources
- Lockheed Martin Retirement Planning: 7 Decisions to Make Before You Retire
- Financial Planning for Lockheed Martin Employees in Dallas-Fort Worth
- Roth Conversions: Why Retirees Talk About Them So Much
- Retirement Income Planning in Dallas
- Tax Planning for Retirees in Dallas
- How Stock Compensation Changes Financial Planning
- Why High Earners Need Brokerage Accounts Beyond Their 401(k)