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Net Unrealized Appreciation (NUA): Turning Employer Stock Into a Tax-Smart Windfall

Authored by Matt Waters

Many executives and long-tenured employees have one wealth-building asset that often flies under the radar: employer stock in their retirement plan. While rolling the stock into an IRA is the default move, it can be a costly mistake. Enter Net Unrealized Appreciation (NUA), a tax strategy that can turn company stock into a multi-million-dollar after-tax advantage.

NUA allows employees to transfer employer stock out of a tax-deferred plan and pay ordinary income tax only on the stock’s cost basis, while the appreciation is taxed at the lower long-term capital gains rate. The result? Significant tax savings and strategic flexibility.

How NUA Works

  1. In-Kind Distribution – At retirement or separation, move employer stock out of the 401(k) or other qualified plan into a taxable brokerage account.
  2. Tax on Basis – Pay ordinary income tax only on the original cost basis of the shares, not the current market value.
  3. Capital Gains on Appreciation – Any growth above the cost basis is subject to long-term capital gains tax when sold.

For executives who have held stock for years, the difference between ordinary income rates (up to 37%) and long-term capital gains rates (typically 20% plus 3.8% Net Investment Income Tax) can translate into millions in tax savings.

Suppose an executive has:

  • 100,000 shares of company stock
  • Cost basis: $10 per share ($1 million total)
  • Current market value: $100 per share ($10 million total)

If rolled into an IRA:

  • Entire $10 million is taxed at ordinary income rates when withdrawn.

Using NUA:

  • Pay ordinary income tax on $1 million basis.
  • Remaining $9 million in appreciation is taxed at long-term capital gains rates when sold.

Outcome: A $10 million stock position could cost $3-4 million less in taxes using NUA versus an IRA rollover.

Benefits of NUA

  • Massive Tax Savings – Especially for long-tenured employees with concentrated stock holdings.
  • Flexibility – Spread the sale of stock over multiple years to manage tax brackets.
  • Strategic Planning – Integrates with charitable giving, estate planning, or reinvestment strategies.

Risks and Considerations

  • Timing Matters – NUA is only available at the time of distribution, typically retirement or separation.
  • Diversification Risk – Concentrated stock positions carry market and company risk.
  • Plan Rules – Not all employer plans allow in-kind distributions.
  • IRS Scrutiny – Proper documentation is critical to validate the NUA election.

 

Option Taxable Amount Tax Rate Taxes Paid After-Tax Value
IRA Rollover $10M Ordinary Income 37% $3.7M $6.3M
NUA Strategy $1M (basis) + $9M (appreciation) 37% on $1M + 20% on $9M $1.88M $8.12M

When NUA Works Best

  • Executives or employees with long-term, highly appreciated company stock.
  • Those approaching or at retirement, ready to take a distribution.
  • Individuals who can manage concentrated stock risk or diversify post-distribution.

Final Thoughts

NUA is a rare tax strategy where proper timing and planning can yield multi-million-dollar savings. For employees with company stock, ignoring NUA can result in paying far more in taxes than necessary, a mistake that’s completely avoidable with foresight.

 

This information does not constitute legal or tax advice. Prime Capital Investment Advisors, (“PCIA”) and its associates do not provide legal or tax advice. Individuals should consult with an attorney or professional specializing in the fields of legal, tax, or accounting regarding the applicability of this information for their situations. Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness.

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