NUA Calculator
Compare net unrealized appreciation treatment against a full IRA rollover for employer stock in a 401(k), and see which leaves more after tax.
How to use this calculator
- 1Ask your plan administrator for the cost basis of the employer stock — the calculation is impossible without it.
- 2Enter the current market value and your ordinary and capital gains rates.
- 3Set how long you would otherwise leave the money invested before withdrawing.
- 4Check the immediate tax figure: it is payable in the distribution year from other savings, and that cash requirement is often what decides the answer.
How the calculation works
NUA = market value − cost basis. NUA route: ordinary tax on basis now + capital gains tax on NUA when sold. Rollover: ordinary tax on everything at withdrawal- cost basis
- What the plan paid for the shares — the only part taxed as ordinary income under NUA
- NUA
- The appreciation while held in the plan, taxed at long-term capital gains rates regardless of holding period
The NUA portion is always treated as long-term capital gain when sold, however briefly the shares are held after distribution. Any further appreciation after the distribution date follows normal holding-period rules.
The strategy is a bet on the rate spread. It is worth most when the ordinary rate is high, the capital gains rate is low, and appreciation is a large share of the position — and worth nothing at all if the two rates are equal.
The tax on the basis is due in the distribution year and must be paid from other funds. Selling shares to cover it undermines the strategy, and if the distribution occurs before 59½ a 10% early distribution penalty can also apply to the basis.
Worked example
$500,000 of stock with a $100,000 basis
- 1.Net unrealized appreciation is $500,000 − $100,000 = $400,000, which is 80% of the position.
- 2.Under NUA you pay 32% on the $100,000 basis now — $32,000 — and the $400,000 is taxed at 15% when sold rather than 32%.
- 3.That is a 17-point saving on $400,000, worth about $68,000 in tax.
- 4.Rolling everything to an IRA instead defers all tax but converts the entire amount to ordinary income at 32% on withdrawal.
Result: NUA clearly ahead where appreciation dominates
When NUA does not work
- 1.Here appreciation is only $100,000 — 20% of the position.
- 2.NUA treatment would mean paying 24% on $400,000 of basis immediately, a $96,000 tax bill.
- 3.The rate saving applies to only $100,000, and is worth about $9,000.
- 4.Paying $96,000 now to save $9,000 later is clearly worse than deferring everything.
Result: Rollover better — the basis is too large a share
What NUA treatment does
Anyone whose 401(k) holds appreciated employer stock has a choice most people never hear about. The default is to roll the whole balance into an IRA, where everything stays tax-deferred and is eventually taxed as ordinary income on withdrawal.
The alternative is net unrealized appreciation treatment. The employer stock is distributed in kind to a taxable brokerage account rather than rolled over. Ordinary income tax is paid immediately, but only on the plan's cost basis in those shares. The appreciation — the NUA — is then taxed at long-term capital gains rates when the shares are eventually sold, regardless of how long they are held after distribution.
The benefit is the rate difference. Someone in the 32% ordinary bracket paying 15% on capital gains saves 17 percentage points on the entire appreciation. On a position with $400,000 of NUA that is worth roughly $68,000. The cost is an immediate tax bill on the basis, payable from other savings.
When it works and when it does not
NUA is not a universally better option, and applying it to the wrong position is expensive. Three conditions determine the answer.
- Appreciation must be a large share of the value — the ratio of NUA to cost basis is the single most important factor. Where appreciation is 70–80% of the position the strategy is usually compelling; where basis is most of the value, the immediate tax swamps the rate saving.
- The rate spread must be wide — the whole benefit is the gap between your ordinary rate and your capital gains rate. Someone in the 12% bracket whose capital gains rate is 0% gains nothing, and may do better rolling over.
- You must be able to pay the tax from other funds — the bill on the basis falls in the distribution year. Selling shares to cover it defeats much of the purpose, and before 59½ a 10% early distribution penalty can apply to the basis as well.
The mechanics that void the election
NUA is unforgiving procedurally, and mistakes cannot be reversed. The distribution must be a qualifying lump-sum distribution: the entire balance of the plan must leave the account within a single calendar year, following a triggering event — separation from service, reaching 59½, total disability, or death.
The usual sequence is to transfer the employer stock in kind to a taxable brokerage account and roll everything else to an IRA, both in the same tax year. Taking a partial distribution in an earlier year, or rolling the employer stock into the IRA by mistake, permanently forfeits the treatment. Once those shares are inside an IRA the appreciation becomes ordinary income forever.
There is also a risk that has nothing to do with tax. Holding a large concentrated position in a former employer's stock in a taxable account means both your past income and a large share of your wealth depended on one company. The tax saving is real, but so is the concentration, and selling to diversify triggers the capital gains tax the strategy was designed to reduce. That trade-off deserves as much attention as the arithmetic.
What this assumes, and where it stops
Assumptions
- The distribution qualifies as a lump-sum distribution under the NUA rules.
- Tax on the cost basis is paid from funds outside the plan.
- A single flat ordinary rate and a single capital gains rate apply throughout.
- Under the rollover comparison, the whole balance is taxed at the ordinary rate on withdrawal.
Limitations
- The 10% early distribution penalty on the cost basis, which applies below age 59½ without an exception, is not calculated.
- State income tax is excluded and can change the comparison, particularly if you expect to move states.
- The 3.8% Net Investment Income Tax on the capital gain is not added separately — include it in the capital gains rate if it applies to you.
- NUA elections are irreversible and procedurally strict. Take professional advice before initiating the distribution.
Common questions
What is net unrealized appreciation?
It is the growth in your employer's stock while it sat inside your 401(k) — the difference between what the plan paid for the shares and what they are worth when distributed. If you take the shares out in kind rather than rolling them to an IRA, you pay ordinary income tax only on the original cost basis, and the appreciation is taxed at long-term capital gains rates when you sell.
When is NUA worth using?
When appreciation is a large share of the position and your ordinary rate is well above your capital gains rate. A position that is 80% appreciation for someone in the 32% bracket paying 15% on gains is a strong candidate. Where the cost basis is most of the value, or the two rates are close, the immediate tax bill on the basis outweighs the rate saving and a straightforward rollover wins.
What happens if I get the distribution wrong?
You lose the treatment permanently. NUA requires a qualifying lump-sum distribution — the entire plan balance out within one calendar year after a triggering event such as leaving the employer or reaching 59½. If the employer stock is rolled into an IRA by mistake, the appreciation becomes ordinary income forever and cannot be recovered. This is why the mechanics are worth confirming with a professional before anything moves.
Do I have to sell the stock straight away?
No. The NUA portion is taxed at long-term capital gains rates whenever you sell, however short the holding period after distribution — so there is no waiting requirement. Any further appreciation after the distribution date follows normal holding rules, needing a year to qualify as long-term. Many people do sell fairly promptly to reduce the concentration risk of holding a large single-stock position outside a retirement account.
Sources
- Topic no. 412, Lump-Sum Distributions — US Internal Revenue Service
- Publication 575, Pension and Annuity Income — US Internal Revenue Service
Formula and content last reviewed on .
Results are estimates for information only, not professional advice.
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