401kNet Unrealized Appreciation (NUA)
If your 401(k) holds employer stock that has grown significantly in value, a special rule can let you pay long-term capital gains rates instead of ordinary income tax on most of that growth.
Reviewed January 2026 against current IRS guidance.
What NUA means
Net unrealized appreciation is the difference between what your employer stock inside the 401(k) originally cost (its "cost basis") and what it's worth when it's distributed to you. Normally, distributing appreciated stock from a 401(k) and immediately selling it would mean the entire value is taxed as ordinary income. The NUA rule offers a different path:
- You pay ordinary income tax immediately only on the stock's original cost basis at the time of distribution.
- The appreciation (the growth above cost basis) is taxed later, when you actually sell the shares, at long-term capital gains rates — regardless of how long you personally hold the shares after distribution.
For stock that has appreciated substantially over many years, the difference between ordinary income rates and long-term capital gains rates on that appreciation can be significant.
The requirements to use NUA
NUA requires a “lump-sum distribution” of your entire vested balance in the plan within a single tax year, following a qualifying triggering event, and the employer stock must be distributed as actual shares (in-kind) — not sold and distributed as cash.
Qualifying triggering events generally include separation from service, reaching age 59½, disability, or death. Rolling the employer stock into an IRA instead of taking it in-kind permanently forfeits the NUA opportunity for that stock — once inside an IRA, all future withdrawals are taxed as ordinary income with no special capital-gains treatment for the built-in appreciation.
A common mistake: rolling everything over automatically
Because rolling over a 401(k) to an IRA is the default, low-friction move when leaving a job, people who hold substantially appreciated employer stock can lose the NUA opportunity without realizing they had it. If your 401(k) includes company stock, it's worth evaluating NUA before executing a rollover — the decision is generally irreversible once the stock has been moved into an IRA.
The 10% early withdrawal penalty and NUA
If you're under 59½ when you take the NUA distribution and no other penalty exception applies, the ordinary-income portion (the cost basis) can still be subject to the 10% early withdrawal penalty, even though the appreciation itself gets capital-gains treatment. This is a narrow, situational strategy that usually benefits from a tax professional's involvement given how large the numbers and the mistakes can both be.