A Strategy to Help Reduce Taxes on Employer Stock in Your Rollover
RETIREMENT TAX STRATEGY
A Strategy to Help Reduce Taxes on Employer Stock in Your Rollover
The Net Unrealized Appreciation (NUA) strategy: a powerful but often overlooked option for retirees holding appreciated employer stock.
If you are fortunate to have accumulated company stock in your employer’s 401(k) plan over many years, it has likely appreciated several times over your original cost. Most people simply roll the entire 401(k) — cash, mutual funds, and company stock alike — into an IRA at retirement. The problem: every dollar eventually distributed from that IRA is taxed as ordinary income, including all the stock’s growth.
There is another way to handle the company stock portion . Let us introduce you to a strategy known as Net Unrealized Appreciation, or NUA.
What Is the NUA Strategy?
The NUA strategy involves splitting your 401(k) rollover into two parts at retirement:
| 1 |
Roll cash and mutual funds into a traditional IRA This defers all income tax until you take distributions in retirement — the standard approach for non-stock assets. |
| 2 |
Transfer employer company stock into a taxable brokerage account You pay ordinary income tax only on your original cost basis (what you paid for the stock). From that point forward, all appreciation is taxed at the much lower long-term capital gains rate of 15% when you eventually sell — not at your higher ordinary income rate. |
The key insight:
Under a standard IRA rollover, the entire value of your company stock — including decades of growth — is eventually taxed as ordinary income. The NUA strategy isolates that appreciation and permanently converts it to long-term capital gain treatment.
NUA vs. Traditional IRA Rollover: At a Glance
| Traditional IRA Rollover |
NUA Strategy |
|
| Tax on cost basis |
Ordinary income tax |
Ordinary income tax |
| Tax on appreciation |
Ordinary income tax |
15% capital gains only |
| Death / step-up in basis |
No benefit |
Full step-up — gain eliminated |
| Flexibility to diversify |
Limited |
Yes — via loss harvesting |
Taking It Further: Loss Harvesting to Unwind Your Stock Position
Once your company stock is in a taxable brokerage account, you may want to begin diversifying — selling the stock and repositioning the proceeds into a broader portfolio. Selling a large, highly appreciated position all at once, however, would trigger a significant capital gains tax bill.
This is where a strategy called tax-loss harvesting can help. Working with an investment firm that offers a custom portfolio, you can systematically harvest temporary losses created by normal market volatility in the account. These losses offset the gains generated when you sell the company stock, reducing or potentially eliminating the capital gains tax owed over time.
How loss harvesting works:
When individual positions in your portfolio temporarily decline due to market volatility, your advisor sells them to realize a tax loss. Those losses are then used to offset capital gains. The sold position is replaced with a similar (but not identical) investment to maintain your market exposure. Over time, these harvested losses accumulate and can offset a substantial portion of your company stock gains.
An Additional Benefit: The Step-Up in Basis at Death
In the event of the premature death of the account owner, an important additional tax benefit may apply. In a community property state, the surviving spouse receives a full step-up in cost basis on the stock to its current fair market value . This effectively eliminates the entire long-term capital gain that had accumulated in the employer stock , meaning the stock can be sold with no capital gains tax whatsoever.
Even in non-community property states, at least a partial step-up in basis is typically available. This makes the NUA strategy not only a powerful tax-reduction tool during your lifetime, but also a meaningful estate planning consideration.
In a community property state:
A full step-up in basis at the death of either spouse eliminates the entire capital gain on the stock — the ultimate tax outcome for the NUA strategy.
Is the NUA Strategy Right for You?
The NUA strategy works best when:
- Your employer stock has appreciated significantly above its original cost basis.
- You are at or near retirement and eligible to take a lump-sum distribution from your 401(k).
- Your ordinary income tax rate is meaningfully higher than the 15% long-term capital gains rate.
- You are interested in eventually diversifying out of a concentrated stock position.
This strategy requires careful coordination at the time of your 401(k) distribution and cannot be undone after the fact. Work closely with your financial advisor and tax professional to determine whether NUA is appropriate for your situation and to execute it correctly.