What is Net Unrealized Appreciation (NUA) and when should I use it?

TL;DR. Net Unrealized Appreciation lets you pay ordinary income tax only on the cost basis of employer stock held in a 401(k) and long-term capital gains rates on the appreciation when you take a lump-sum distribution. With 2026 long-term capital gains rates at 0%, 15%, or 20% versus ordinary rates up to 37%, NUA can save tens of thousands on highly appreciated company stock. An NUA calculator compares the tax cost of NUA treatment against a standard IRA rollover.

How NUA works in practice

When you separate from service (or hit another qualifying event), you can take a lump-sum distribution of your entire 401(k) balance. If the plan holds employer stock, the NUA rules let you split the tax treatment.

Worked example. A 62-year-old retiree has $400,000 in her 401(k): $150,000 in mutual funds and $250,000 in employer stock with a cost basis of $50,000. The NUA — the appreciation above basis — is $200,000.

Under NUA treatment, she rolls the $150,000 of mutual funds to an IRA (no immediate tax). She distributes the employer stock to a taxable brokerage account. Tax owed now: ordinary income tax on the $50,000 cost basis. At the 22% bracket, that is $11,000. The $200,000 of NUA is not taxed until she sells the shares, and it qualifies for long-term capital gains rates regardless of her actual holding period. At the 15% rate, that is $30,000 when she eventually sells.

Compare to a full rollover. If she rolls the entire $400,000 to an IRA and later withdraws the $250,000 of stock value as ordinary income at 24%, she pays $60,000. NUA treatment saves her $19,000 in this scenario. An NUA calculator quantifies exactly this comparison.

Try it with your numbers

What a good NUA calculator should show

• Side-by-side tax cost: NUA distribution vs. full IRA rollover
• Ordinary income tax on the cost basis at your current bracket
• Long-term capital gains tax on the appreciation at 0%, 15%, or 20%
• Net investment income tax (3.8%) impact when applicable
• Break-even analysis if the stock is only moderately appreciated

AdvisorCal's NUA Calculator handles all of the above. Cross-reference with the Tax Bracket Calculator to confirm your client's marginal rate, or the Roth Conversion Calculator if a partial Roth conversion of the non-stock balance makes sense.

Key facts

• Long-term capital gains rates (2026): 0% up to $48,350 single / $96,700 MFJ; 15% up to $533,400 single / $600,050 MFJ; 20% above those thresholds.
• 20% LTCG threshold: approximately $518,900 single / $583,750 MFJ for taxable income.
• Net investment income tax: 3.8% on investment income above $200,000 single / $250,000 MFJ (unchanged since 2013).
• Qualifying events for NUA: separation from service, reaching age 59 1/2, disability (self-employed only), or death.
• Lump-sum requirement: the entire vested balance must be distributed within one tax year; partial distributions do not qualify.
• Cost basis source: the plan administrator provides the cost basis on Form 1099-R (Box 6).

Common follow-ups

When does NUA not make sense compared to a rollover? NUA loses its advantage when the appreciation is small relative to the cost basis. If your employer stock has a $200,000 basis and $220,000 current value, the NUA is only $20,000. You would pay ordinary income tax on the $200,000 basis upfront instead of deferring it inside an IRA. The NUA vs rollover break-even typically favors NUA when the appreciation is at least two to three times the cost basis.

What happens to additional gains after the NUA distribution? Once the employer stock lands in a taxable brokerage account, any further appreciation above the NUA amount is taxed based on your actual holding period from the distribution date. Sell within a year and those additional gains are short-term (ordinary rates). Hold longer than a year and they qualify for long-term capital gains. The original NUA amount always gets long-term treatment regardless.

Can I use NUA and then do a Roth conversion on the rest? Yes, and this is a powerful combined strategy. Distribute the appreciated employer stock under NUA rules to a taxable account. Roll the remaining 401(k) balance (mutual funds, bonds, cash) to a Traditional IRA, then convert some or all to Roth. The Backdoor Roth Calculator and Roth Conversion Calculator can model the non-stock portion.

Does the 3.8% net investment income tax apply to NUA gains? Yes. When you sell the distributed shares, the NUA gain counts as net investment income. If your modified AGI exceeds $200,000 (single) or $250,000 (MFJ), the 3.8% NIIT applies on top of the capital gains rate. For high-income clients, the effective rate on NUA appreciation could be 18.8% or 23.8% rather than a clean 15% or 20%. An appreciated employer stock tax treatment calculator should include NIIT in the comparison.

When this doesn't apply

NUA only applies to employer securities held inside an employer-sponsored retirement plan — typically a 401(k), ESOP, or profit-sharing plan. It does not apply to stock held in an IRA, stock purchased outside the plan, or non-employer stock within the plan. The lump-sum distribution requirement is strict: if the client already took a partial distribution from the plan in the same year, NUA treatment for the remaining balance is disqualified. Clients who do not hold meaningful employer stock positions — or whose company stock has not appreciated significantly — should default to a standard IRA rollover.

Sources

• IRS — Tax treatment of NUA (Publication 575)
• IRS — Net investment income tax (IRC 1411)

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AdvisorCal provides software tools, not investment, tax, or legal advice. Consult a qualified professional for decisions specific to your client or personal situation.