Before You Roll Over Your 401(k): The Company Stock Tax Break Most People Miss
If your 401(k) holds shares of your employer's stock that have grown substantially in value, a rule called net unrealized appreciation, or NUA, may allow you to pay ordinary income tax only on what those shares originally cost while the growth above that cost is taxed later at long term capital gains rates (which top out at 20% in 2026 compared with 37% for ordinary income). The catch is that this option disappears the moment the shares are rolled into an IRA, which is exactly what most people do by default when they leave a job or retire.
For someone with a large, long held position in company stock, the difference between those two rates can amount to tens or even hundreds of thousands of dollars over a retirement, and because the decision has to be made before any money moves, it is worth understanding well before the rollover paperwork arrives.
What Net Unrealized Appreciation Means
Net unrealized appreciation is the difference between what your 401(k) paid for your employer's shares and what those shares are worth on the day they leave the plan, so if the plan bought shares for you over the years at a total cost of $75,000 and they are worth $500,000 today, your cost basis is $75,000 and your net unrealized appreciation is $425,000.
Every dollar that comes out of a 401(k) or IRA is normally taxed as ordinary income in the year you withdraw it, regardless of what the money was invested in, but the tax code carves out a narrow exception for employer stock. When the shares are distributed to you in-kind, meaning as actual shares rather than sold and converted to cash, the shares are split into two pieces and each piece is taxed on its own terms.
How Each Piece Is Taxed
The cost basis is taxed as ordinary income in the year of the distribution, so in the example above, $75,000 is added to your taxable income for that year at whatever your marginal rate happens to be.
The appreciation is not taxed when the shares leave the plan. It is taxed only when you sell, and it is always treated as a long-term capital gain even if you sell the following morning, which means there is no waiting period to qualify for the lower rate on that portion.
Growth that occurs after the shares land in your brokerage account is treated like any other investment you own, taxed at long-term rates if you hold the shares for more than a year after the distribution and at ordinary rates if you sell sooner.
What the 2026 Rates Mean in Practice
In 2026, married couples filing jointly pay 0% on long-term capital gains when taxable income is $98,900 or less, 15% up to $613,700 and 20% above that, while single filers pay 0% up to $49,450, 15% up to $545,500 and 20% beyond. Ordinary income, by contrast, climbs to a top rate of 37% for married couples with taxable income above $768,700 and single filers above $640,600.
There is a further advantage that rarely gets mentioned, which is that the NUA portion is generally exempt from the 3.8% net investment income tax that applies to many investment gains for higher earners, although growth after the distribution can still be subject to it.
Returning to the $500,000 position with a $75,000 basis, if those shares were rolled into an IRA and withdrawn over retirement at a 24% marginal rate, the eventual federal tax would be roughly $120,000. Using NUA instead, the $75,000 basis would be taxed at ordinary rates, around $18,000 at that same 24% rate, and for a married couple whose taxable income stays below $613,700 in the year of sale, the $425,000 of appreciation would be taxed at 15%, or about $63,750, bringing the total to roughly $82,000 and saving close to $38,000. Selling gradually across years can help keep the gains within that 15% bracket. These figures are simplified to show the shape of the decision rather than to replace a projection built on your own numbers.
The Rules You Have to Follow
The distribution must follow one of four triggering events, which are separating from service with the employer, reaching age 59½, becoming disabled or death, and for most people approaching retirement the relevant trigger is either leaving the company or turning 59½.
It must also be a lump sum distribution, meaning your entire vested balance in that employer's plan has to come out within a single calendar year, although not all of it has to land in a taxable account. A common approach is to move the company shares into a brokerage account using NUA and roll the remaining investments directly into an IRA in the same year. What you cannot do is leave part of the balance in the plan into the following year or take a partial withdrawal in an earlier year after the triggering event, since either can disqualify the lump sum.
Finally, the shares must come out as shares, because if the plan sells the stock and sends you cash, or if the stock is rolled into an IRA first, NUA treatment is lost and cannot be recovered. If you are already taking required minimum distributions, the RMD for that year generally has to be satisfied before the rest of the account is distributed or rolled over.
When NUA Makes Sense and When It Does Not
NUA works best when the gap between your cost basis and the current value is wide, because you pay ordinary income tax on a modest amount now in exchange for capital gains treatment on a much larger amount later, which tends to describe people who joined a company early, accumulated shares at much lower prices or held a position through a long run of growth.
It works less well when the basis is high relative to today's value, since there is little appreciation to convert and you would mostly be accelerating ordinary income tax that could have stayed deferred inside an IRA for years, in which case a straightforward rollover is usually the better choice.
Age plays a role as well, because if you are under 59½ the 10% early withdrawal penalty can apply to the basis portion of the distribution, though not to the appreciation, and leaving your employer in or after the year you turn 55 may exempt you from that penalty for distributions from that employer's plan.
Timing within your broader income picture matters too. Because the entire basis is taxed as ordinary income in one year, a large basis can push you into a higher bracket, so many people aim for a year with lower income, such as the first full year after retirement when salary has stopped, but Social Security and required distributions have not yet begun. Anyone within two years of Medicare eligibility should also consider how the extra income will affect their premiums, which are based on income from two years earlier.
Some plans track the cost of individual purchase lots, which can allow you to apply NUA only to the lowest basis shares and roll the higher basis shares into an IRA along with everything else, so it is worth asking your plan administrator whether that flexibility is available before anything is set in motion.
The Concentration Question
Holding a large share of your net worth in the company that also paid your salary for decades is a real exposure that the tax benefit does nothing to reduce, but NUA can actually help here, because the appreciation qualifies for capital gains treatment as soon as the shares leave the plan, which means you can begin selling down the position and diversifying right away rather than holding on for years to avoid a large tax bill, and spreading those sales over several tax years can help keep the gains within the 15% bracket.
What Happens to NUA Shares at Death
Most appreciated assets receive a step up in basis at death, but the NUA portion does not, because it is treated as income in respect of a decedent, so your heirs will owe capital gains tax on it when they sell. Growth after the original distribution can still receive a step up, which matters for anyone planning to hold the shares for life.
Making the Decision
The most important thing to understand about NUA is that the choice has to be made before any money moves, because once employer shares have been rolled into an IRA or sold inside the plan the opportunity is gone, and many people lose it simply because a rollover was the default option on the form.
If you hold company stock in a 401(k) and are approaching retirement, leaving a job or turning 59½, the first step is to pull your plan statements and find your cost basis, since that single number compared with today's value will tell you whether NUA deserves a closer look. From there, the decision depends on your tax bracket now and in the years ahead, your plans for the shares, your other sources of retirement income and how comfortable you are holding a concentrated position, all of which are best worked through with a tax professional or financial planner before you sign anything.
This article is provided for general educational purposes only and does not constitute tax, legal or investment advice. Please consult a qualified professional about your own circumstances before acting on any of the strategies described.
Sources:
Internal Revenue Service, tax year 2026 inflation adjustments -https://content.govdelivery.com/accounts/USIRS/bulletins/3f65fe1
Kiplinger, 2026 capital gains tax thresholds -
Thomson Reuters Checkpoint, key 2026 tax figures -
Michael Kitces in Financial Planning, the rules for net unrealized appreciation -
The CPA Journal, planning considerations for net unrealized appreciation -
IMPORTANT DISCLOSURES
Any opinions expressed through Claude -powered analysis, Corbett Road Wealth Management, LLC, or by Concurrent Investment Advisors, LLC, reflect viewpoints as of the date produced. They are subject to change without notice and should not be interpreted as personalized advice or predictions.
This report and any Claude -generated outputs do not constitute legal, tax, or accounting advice. Before making decisions with legal or tax implications, consult the appropriate licensed professionals. Corbett Road Wealth Management, LLC nor Concurrent Investment Advisors, LLC provide legal or tax advice.
This communication is for informational purposes only and does not constitute legal, tax, financial, or other professional advice. Individuals should consult their own legal, tax, financial, or other professional advisors regarding their specific circumstances. Certain information presented in this communication may be sourced from third parties. While Concurrent deems such sources to be reliable, neither Concurrent nor any of its managers, officers, employees, agents, or affiliates represents that such information is accurate, current, or complete, and such information is subject to change without notice.
Corbett Road Wealth Management is not affiliated with nor endorsed by the social security administration or any other government agency and does not provide legal or tax advice
Corbett Road Wealth Management provides all investment advisory services through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Corbett Road Wealth Management and Concurrent Investment Advisors, LLC are not affiliated companies.
