$400,000 in Employer Stock Inside Your 401(k)? This Tax Rule Could Save You $65,000 Before You Retire

Marc Guberti

Sat, August 8, 2026 at 4:39 PM PDT 5 min read

Quick Read

• The NUA rule taxes employer stock appreciation at long-term capital gains rates, potentially saving retirees tens of thousands versus a standard IRA rollover.

• Using NUA on $400,000 of employer stock with a $60,000 basis cuts federal tax to roughly $65,400, far below the IRA rollover bill.

• IRA withdrawals can make up to 85% of Social Security taxable and trigger Medicare IRMAA surcharges, a cascading cost NUA elections help avoid.

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A 62-year-old engineer retiring next spring has $1.4 million in her 401(k). Roughly $400,000 sits in her employer's stock, purchased over two decades through payroll deferrals and matching contributions at a blended cost basis near $60,000. Her advisor's first instinct is a clean rollover into an IRA. That single move would cost her tens of thousands of dollars she does not have to pay.

The rule she needs to know is Net Unrealized Appreciation, or NUA. It lives in IRC Section 402(e)(4) and applies only to employer securities held inside a qualified plan. If her employer stock stays inside the 401(k) until rollover, every future dollar of gain becomes ordinary income when withdrawn. If she uses NUA instead, the appreciation is taxed at long-term capital gains rates for the rest of her life.

How the NUA Election Works

Four conditions must align. First, a triggering event: separation from service, reaching age 59½, disability, or death. Second, a lump-sum distribution of the entire 401(k) balance in a single tax year. Third, the employer shares must move in-kind to a taxable brokerage account rather than an IRA. Fourth, cash and non-employer-stock assets can roll to an IRA in the same year.

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When the shares land in the taxable account, only the cost basis is taxed as ordinary income that year. The appreciation, the NUA, is not taxed until she sells the shares, and when she does, it is taxed at long-term capital gains rates regardless of how long she has held the shares outside the plan. Any additional appreciation after the distribution date follows normal short- or long-term rules.