Got Company Stock in Your 401(k)? You Should Know about NUD.
You may have heard about the tax strategy called Net Unrealized Appreciation, but there’s another lesser-known strategy that could be especially useful right now: Net Unrealized Depreciation.


In many large publicly traded companies, it’s common to reward employees with employer stock. Usually through a profit-sharing or ESOP plan, or at least by allowing employees to purchase stock themselves inside of their 401(k) plan. The disadvantage is when you withdraw money from a company plan, it is taxed as ordinary income. However, the IRS — if you can believe it — has two special rules to help: Net Unrealized Appreciation (NUA) and Net Unrealized Depreciation (NUD).
Given today’s stock market volatility, it’s the NUD rule that piques my interest right now.
First things first – understand the NUA rule
Net Unrealized Appreciation (NUA) is a clunky technical term but an important potential tax-savings opportunity for those with company stock in their employer plan. Under the NUA rule, only the cost basis of the shares is subject to tax (and potentially an early withdrawal penalty) at the time of the distribution. In simple terms, the cost basis is what a person pays for the stock. The net unrealized appreciation is the growth of the stock above the cost basis. When you leave the employer and want to take a withdrawal of company stock from the retirement plan, if you follow the NUA rules, there could be a substantial tax savings. Here's how:

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The NUA is not subject to ordinary income tax until the company stock is sold and will never be subject to an early withdrawal penalty. When the stock is sold, the NUA is subject to tax at capital gains rates — not ordinary income tax rates, which can be much higher, depending on your income and current tax rates. Additionally, the NUA is not subject to the 3.8% Medicare surtax on net investment income. The favorable tax treatment for the NUA portion of company stock distributions is what we call the NUA rule.
Why Net Unrealized Depreciation now?
A similar sounding name, but different strategy all together, is Net Unrealized Depreciation, or NUD. Participants holding company stock within a retirement plan that has decreased sharply in value may want to consider resetting the cost basis of that stock by selling the stock within the plan and repurchasing it shortly thereafter inside the plan. Unlike stock transactions outside of a retirement plan, the “wash sale” rule does not apply. We call this "stepping-down" the cost basis – provided you repurchase the stock at a lower price.
Why consider stepping-down the basis? A bigger gap between the cost basis — what you paid for the stock — and the potential growth from that point forward creates more opportunity to apply the NUA rule in the future. The NUD strategy is particularly important now given the stock market volatility we’ve seen lately. If you have employer stock in your company retirement plan, consider reviewing the cost basis versus the current market price. If the current stock price is lower than your cost basis, that may be an opportunity to apply the NUD strategy – selling the stock and immediately buying back within the plan to step down the cost basis. (Be sure to check with your plan administrator prior to implementing either the NUA or the NUD strategy to ensure your plan allows it.)
Final Thoughts
There are many considerations to making the Net Unrealized Appreciation election. It really depends on the individual’s situation. Meanwhile, the Net Unrealized Depreciation strategy is a little less complex: You are only resetting your cost basis. However, stepping-down your cost basis may give yourself potentially more of an opportunity to apply the NUA rule in the future if you do so choose the NUA election upon retirement. Most of all, investors should weigh the merits (and risks) of owning their company stock in the first place. A high concentration – more than 10% of the portfolio in a single stock – is risky in my opinion.
There is much to consider when evaluating an NUA or NUD strategy. I advise clients not to go it alone. NUA calculators are a helpful tool to quantify the potential tax benefits. But it's not just about NUA and NUD; it's about taking a holistic look at the pieces to your retirement and your financial plan. An experienced professional can help you see the big picture, explain the advantages and disadvantages, and help you make the right decision.
If you want to learn more or discuss your financial planning, please feel free to email me for a complimentary consultation.
Disclaimer: Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.
Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.
-
The Five Social Security Blind Spots Retirees Often Miss
Understand how benefits work before applying, so you don’t lose money for which you qualify.
-
Stock Market Today: S&P 500, Nasdaq Hit New Highs After Vietnam Trade Deal
Ahead of a key July 9 tariff deadline, President Trump said the U.S. has reached a trade deal with Vietnam.
-
Social Security's First Beneficiary Lived to Be 100: Will You?
Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
-
An Investment Strategist Demystifies Direct Indexing: Is It for You?
You've heard of mutual funds and ETFs, but direct indexing may be a new concept ... one that could offer greater flexibility and possible tax savings.
-
Q2 2025 Post-Mortem: Rebound, Risks and Generational Shifts
As the third quarter gets underway, here are some takeaways from the market's second-quarter performance to consider as you make investment decisions.
-
Why Homeowners Should Beware of Tangled Titles
If you're planning to pass down property to your heirs, a 'tangled title' can complicate things. The good news is it can be avoided. Here's how.
-
A Cautionary Tale: Why Older Adults Should Think Twice About Being Landlords
Becoming a landlord late in life can be a risky venture because of potential health issues, cognitive challenges and susceptibility to financial exploitation.
-
Home Equity Evolution: A Fresh Approach to Funding Life's Biggest Needs
Homeowners leverage their home equity through various strategies, such as HELOCs or reverse mortgages. A newer option: Shared equity models. How do those work, and what are the pros and cons?
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the Fairway
Think of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty Moves
If you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.