Company Stock in Your 401(k)?

Here’s a Tax Strategy You Might Be Missing

Xartis Wealth Advisors | July 15th, 2025

---

If you’ve accumulated company shares inside your 401(k), there may be a powerful tax opportunity sitting right under your nose — one that can help you minimize taxes when you eventually draw down those assets. It’s called Net Unrealized Appreciation (NUA), and in the right circumstances, it can reduce the tax you pay on your company stock after you leave your job or retire.

Whether you’re about to retire, switch jobs, or simply want to optimize your tax picture, it’s worth learning the basics of NUA and deciding if it fits your plan.

---

What Exactly is NUA — and Why Does it Matter?

Net Unrealized Appreciation (NUA) is simply the increase in value of company stock inside your 401(k) plan. Specifically, NUA is the difference between the price you originally paid for company shares (your cost basis) and what they’re currently worth.

Here’s a quick example:

• Suppose you acquired company stock at $50 per share.

• Over the years, those shares grow to $100 per share.

• If you bought 100 shares for $5,000 originally, those shares are now worth $10,000 — creating $5,000 in NUA.

When it comes time to take those shares out of your 401(k), there are two main paths:

1. Roll the company stock into an IRA — this allows you to defer tax, but all distributions down the road will be taxed as ordinary income.

2. Distribute the company stock directly into a taxable account — pay tax only on your original cost basis up front. Later, when you sell the stock, the NUA is taxed at long-term capital gains rates, which are often much lower than income tax rates.

---

💡 Key tax insight: With NUA, you pay regular income tax only on the small original cost — and when you sell those shares later, the appreciation is taxed as a capital gain (currently capped at 20% federally). If you’re expecting a higher tax bracket later in life, NUA can translate into meaningful savings.

---

When NUA Could Pay Off

There are a few situations where this tax-saving strategy can make a significant difference:

✅ Your income is lower than usual — If you leave your employer and have a few years before Social Security, pensions, or required minimum distributions (RMDs) kick in, you might pay tax at a lower rate on the cost basis today.

✅ Your company stock has appreciated substantially — The larger the NUA portion, the more potential tax savings if you pay ordinary tax rates on a small cost basis now, then capital gains rates on the bigger gain later.

✅ You anticipate a jump in future tax rates — Retiring before RMDs or other income sources begin can give you a short window to take advantage of NUA at lower tax rates.

---

NUA in Action: Two Examples

✅ Example 1: Lowering Future RMDs

Imagine Sarah, who retires at 65 with a $2 million 401(k), including $500,000 in company stock purchased at a $50,000 cost basis.

By electing NUA treatment at retirement:

• Sarah pays tax on $50,000 immediately.

• Moves the stock into a brokerage account.

• Reduces her RMDs going forward.

When she eventually sells the stock, most of the gain ($450,000) is taxed at the lower long-term capital gains rate.

---

❌ Example 2: Waiting Makes More Sense

Consider Mark, a high-income executive who expects his tax bracket to drop after retiring in five years.

If Mark distributes his company shares using NUA today, he’d pay tax at 35% on the cost basis. Waiting and rolling the stock into an IRA would allow him to take withdrawals in retirement at 22% tax rates — making NUA less appealing.

---

Could NUA Fit Into Your Retirement Strategy?

NUA often works well for investors who:

• Have company stock with a big gap between its cost and market value.

• Plan to drop into a lower tax bracket in retirement.

• Want to manage future RMDs.

• Benefit from long-term capital gains rates.

That said, NUA comes with strict rules. To qualify:

• You must take a lump-sum distribution of all company plan assets.

• The company stock must transfer “in-kind” (as shares, not cash).

• And you must have a qualifying event — retirement, disability, reaching age 59½, or death.

Missing a single requirement can disqualify NUA treatment and trigger higher tax rates and possible penalties.

---

NUA Is Powerful — If It Fits

When used correctly, NUA can trim tens of thousands of dollars off your tax bill. However, like any tax strategy, it pays to plan carefully. Working closely with a financial advisor or tax planner can help you run the numbers, so you make the most of this under-the-radar tax break.

Have more questions or would like to discuss this topic further, please use the link below;