Has Company Stock in Your 401(k) Soared in Value? This Little-Known IRS Rule Could Slash Your Tax Bill

Knowing about net unrealized appreciation — the gap between what you paid for your company shares and what they're worth today — could save you thousands in taxes. Here's how it works.

By Scott Schwitzer Reviewed by Charlotte Gorbold

Published 10 September 2026 In Features

Rising chart with an arrow and a rocket flying over it — (Image credit: Getty Images)

Every year, thousands of employees and executives retire or leave a job with a 401(k) full of company stock and unknowingly pay far more in taxes than necessary.

The culprit is a lack of awareness around net unrealized appreciation (NUA), a little-known IRS provision that can convert a chunk of ordinary income tax into much cheaper long-term capital gains tax.

If you or your executives hold concentrated employer stock in a 401(k), profit-sharing plan or employee stock ownership plan (ESOP), understanding NUA could mean the difference between a seven-figure tax bill and meaningful savings.

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What is NUA?

NUA is simply the growth in your company stock's value while it sat inside your retirement plan. To put it another way, it's the gap between what you (or your employer, via matches or stock bonuses) paid for the shares and what they're worth today.

Consider an executive who accumulated employer stock over a 20-year career with a cost basis of $200,000 and whose position is now worth $4.2 million. The $4 million difference is the NUA.

Under normal 401(k) rules, every dollar you eventually withdraw, including all that appreciation, gets taxed as ordinary income, which can run as high as 37% for top earners. On a $4 million distribution taxed entirely as ordinary income, that's roughly $1.5 million owed to the IRS.

NUA treatment changes that equation by letting you split the stock into two tax buckets: The $200,000 cost basis, taxed as ordinary income now, and the $4 million appreciation, taxed later at long-term capital gains rates (currently capped at 20% federally) whenever the shares are sold.

About Adviser Intel

The author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Why NUA is a big deal for executives

This distinction matters most for executives and long-tenured employees as they're the ones most likely to hold large, highly appreciated positions in employer stock after years of matches, ESOP allocations or stock bonus programs.

In this scenario, using NUA could shift roughly $4 million from a 37% ordinary income bracket down to a 20% capital gains bracket, a potential difference of more than $600,000 in taxes owed, simply by handling the distribution correctly.

There's an added bonus: The NUA portion, along with any gains after distribution, escapes the 10% early withdrawal penalty regardless of the employee's age, and it's exempt from the 3.8% Net Investment Income Tax as well.

The rules you can't skip

NUA isn't automatic. It only applies if very specific IRS requirements are met, and missing even one disqualifies the entire strategy. Use this checklist if you are considering it:

A "triggering event" must occur first: Separation from the employer, reaching age 59½, disability or death.
The entire vested balance across all of that employer's qualified plans must be distributed within a single calendar year, with no partial distributions carried into the next year.
The company stock must be distributed "in-kind" as actual shares into a taxable brokerage account, never sold for cash first.
If required minimum distributions were already taken in a prior year, NUA eligibility is lost. Taking only the current year's RMD is still allowed as long as the account is zeroed out by year-end.
The stock must currently sit in a tax-deferred account, such as a traditional 401(k). It can't be in a Roth 401(k) or Roth IRA.

How the process actually works

Once eligibility is confirmed, the mechanics are straightforward but require careful sequencing.

The employer stock gets distributed in-kind directly into a non-qualified brokerage account, triggering an immediate ordinary income tax bill on the $200,000 cost basis only.
Meanwhile, any remaining 401(k) assets, such as mutual funds, cash or other holdings, can be rolled over tax-free into a traditional IRA or a new employer plan.
From there, the $4 million NUA portion sits untaxed until the shares are actually sold, at which point it's taxed at long-term capital gains rates no matter how briefly the shares were held after distribution.
Any additional appreciation that occurs after the distribution date is taxed separately, following normal short- or long-term capital gains rules based on the new holding period.

Common mistakes to avoid

The biggest and most irreversible mistake is rolling employer stock into an IRA by default, as this permanently forfeits NUA treatment on that entire $4 million gain. This is a common outcome when executives don't flag their intent in advance.

Other frequent missteps include taking RMDs in a prior year without realizing it disqualifies future NUA eligibility, selling shares inside the plan before distribution (converting NUA to cash disqualifies it), and failing to distribute the full account balance within one tax year.

Making the decision

NUA isn't right for everyone, but for an executive with a large basis-to-value gap, the math is compelling. It works best when the stock is highly appreciated relative to its basis, when the executive doesn't need immediate liquidity to cover the upfront ordinary income tax on the basis, and when long-term capital gains rates offer a real advantage over the executive's ordinary income bracket.

For those under 59½, the trade-off between the 10% early withdrawal penalty on the cost basis and the long-term tax savings on the multimillion-dollar gain needs careful modeling.

Given how irreversible and rules-driven this strategy is, any executive sitting on a concentrated, highly appreciated position of employer stock inside a 401(k) — especially those approaching retirement or a job change — should run the numbers with a financial adviser or tax professional well before their triggering event happens, not after.

Once the account is rolled into an IRA, the opportunity to save hundreds of thousands (or more) is gone for good.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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At Peak American Financial, Scott serves as the Director of Wealth Management. With nearly 20 years of experience, he brings seasoned insight and leadership to the team, helping to serve the high-achievers Peak is proud to support. In his free time, Scott cherishes time with his wife, Kristian, their children and their dogs. The family enjoys traveling together, exploring new destinations and making lasting memories. For Scott, relaxation comes through the discipline and focus of martial arts — a passion that keeps him grounded amidst a dynamic professional life.