Net Unrealized Appreciation: A Hidden Tax Strategy
It’s common knowledge that retirement income is subject to taxation. What’s not as well known is that some of that income is subject to a lower tax rate through Net Unrealized Appreciation.


Most people are familiar with the idea of saving as much as possible during their working years and investing savings wisely to maximize returns once they retire. But it is just as important to consider tax strategy. After all, if you pay more taxes on your retirement distributions than the law requires, that can cost you precious cash in your golden years.
Ignoring accounts that hold company stock is one way we see people lose money in taxes. Many workers either get company stock as part of their compensation or are able to take advantage of company 401(k) programs that include company stock. In retirement, how you distribute that company stock will play a key role in determining your tax liability for its value.
Usually, any distributions you take from tax-deferred retirement accounts are taxed as ordinary income when you distribute them. If that retirement account includes stocks and those stocks appreciated while you owned them, you’ll pay ordinary income taxes on the stocks’ value at the time of distribution. For large holdings of stocks that increased significantly in value while you held them, the resulting tax bill can be significant.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free 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.
However, if the stock is in the company you worked for, there’s an opportunity to reduce that tax burden. Through Net Unrealized Appreciation, or NUA, the IRS will only tax the basis — the purchase cost — of company stock at ordinary income rates. Any appreciation in that stock gets taxed at a lower capital gains rate. If you’re fortunate enough to have worked for a company whose stock gained significantly in value over your career, this strategy can save you a lot of money.
For example, you have a 401(k) that holds $500,000 in company stock, but it only cost $100,000 to acquire. Distributing it normally in retirement would result in you paying ordinary income tax on half a million dollars. By applying the NUA strategy, you’d only pay ordinary income tax on $100,000. The remaining $400,000 would be taxed at a friendlier long-term capital gains rate.
The NUA can save you money in another way as well. Pulling NUA stocks out of a retirement account before rolling that account into an IRA means there’s less money in the IRA. Because required minimum distributions are calculated based on a retirement account’s value, having less money in the IRA reduces your RMDs. That automatically lowers your tax bill on those RMDs as well.
The NUA treatment is a powerful tool for the right situation. However, there are a number of factors you need to keep in mind when considering the NUA treatment for your company stocks.
Triggering Events
In order to apply NUA treatment to a stock, there must first be a triggering event, such as quitting, retiring or getting fired from your job. Death, disability and turning age 59½ also qualify as triggering events.
Tax-Deferred Accounts Only
Once the triggering event happens, you need to follow the rules to ensure the stock is eligible for NUA. The stock must be in a tax-deferred retirement account. Accounts like Roth IRAs and other tax-exempt vehicles don’t qualify. If the stock is held by a mutual fund account, the fund must only hold company stock or cash. Stock from other companies disqualifies the fund. You can still diversify your 401(k) and invest in other funds within it while working. The fund you intend to apply NUA treatment to must consist of only company stock or cash.
Complete Distribution
If you want to take advantage of NUA tax opportunities, you need to distribute the entire retirement account in the year of the NUA, but there’s a pitfall to avoid here too. It’s common to roll retirement accounts into IRAs to distribute them. But doing so with an account that contains company stock will render it ineligible for NUA treatment.
To preserve eligibility, you need to take the company stock out of the retirement account and put it in a brokerage account. Then you can roll the rest of the account into an IRA.
Is This the Right Strategy for You?
You might think, at this point, that whenever you have NUA-eligible assets, you should always take advantage of that opportunity. But there are scenarios where it doesn’t make sense to do so. For instance, if your basis is high relative to its current value, it’s possible that you’d come out ahead by simply rolling the entire account into an IRA.
In such scenarios, it’s wise to compare predicted outcomes of keeping it in a tax-deferred account as long as possible versus distributing it now and applying the NUA strategy. But forecasting those outcomes is no small task and probably not one you want to perform yourself.
There are a lot of nuances in dealing with retirement account distributions. It’s important to work with a financial planner to make sure you take the right steps. Financial planners can work to predict the most likely spectrum of future tax rates at distribution time for your accounts. And they can make sure distributions are handled properly, so company stocks don’t lose NUA eligibility through missteps. Working with a financial adviser to handle your investment accounts can help put you on a path to maximizing your assets in retirement.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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.

As Principal and Director of Financial Planning, Sam Gaeta helps clients identify financial goals and make plan recommendations using the five domains of financial planning — Cash Flow, Investments, Insurance, Taxes and Estate Planning. He is responsible for prioritizing clients' financial objectives and effectively implementing their investment plans and actively monitors the ever-changing nature of clients' financial and investment plans.
-
Stocks Rise to End a Volatile Week: Stock Market Today
The market's fear index reached and retreated from a six-month intraday peak on Friday as stocks closed the week well.
-
Kiplinger News Quiz, Oct 17 — Longest Government Shutdown?
Quiz We covered stories about the shutdown, Medicare and vehicle recalls this week, but why? Test yourself on the latest financial and business news.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track Record
Homeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Why Does It Take Insurers So Darn Long to Pay Claims? An Insurance Expert Explains
The process of verification, investigation and cost assessment after a loss is complex and goes beyond simply cutting a check.
-
Two Reasons to Consider Deferred Compensation in the Wake of the OBBB, From a Financial Planner
Deferred compensation plans let you potentially lower your current taxes and help to keep you out of a higher tax bracket. It's important to consider the risks.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)
Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation Target
Yes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial Adviser
The lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable Giving
Taxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
A 'Fast, Fair and Friendly' Fail: Farmers Irks Customers With Its Handling of a Data Breach
Farmers Insurance is facing negative attention and lawsuits because of a three-month delay in notifying 1.1 million policyholders about a data breach. Here's what you can do if you're affected.