Can the Net Unrealized Appreciation Election Save You Money on Employer Stock in Your Retirement Plan?

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Employer stock held in a retirement plan may offer a tax-saving opportunity that many participants overlook. Under certain circumstances, a special tax provision allows appreciated employer stock to receive favorable capital gains treatment rather than being taxed entirely as ordinary income. Understanding the requirements before withdrawing or rolling over retirement assets can make a substantial difference in the taxes you ultimately pay.

What Net Unrealized Appreciation Is and How the Election Works

Net Unrealized Appreciation (NUA) is the difference between the cost basis of employer stock held in a qualified retirement plan and its fair market value when distributed.

Under Internal Revenue Code Section 402(e)(4), qualifying participants can transfer employer shares directly into a taxable brokerage account. The stock’s cost basis generally becomes taxable as ordinary income in the distribution year, while the appreciation receives long-term capital gains treatment when the shares are sold.

For 2026, ordinary federal income tax rates range from 10% to 37%, compared with long-term capital gains rates of 0%, 15%, or 20%.

This NUA tax strategy can be particularly valuable when employer stock has appreciated substantially and the participant expects to face higher ordinary income tax rates during retirement.

What Qualifies as a Lump Sum Distribution for NUA Purposes

The Net Unrealized Appreciation rules generally require distributing the entire balance of the applicable qualified retirement plan within a single tax year following an eligible triggering event.

Four events can establish eligibility:

• Separation from service, including retirement or termination
• Reaching age 59½
• Death of the participant
• Disability, subject to specific statutory requirements

A qualifying lump sum distribution does not require receiving the entire balance in cash. Employer securities can generally be distributed in kind to a taxable account, while other eligible retirement assets may be distributed or rolled over to an IRA or other eligible retirement plan, subject to applicable rules.

Importantly, the triggering event does not necessarily have to occur in the same year as the distribution. However, an intervening distribution can prevent a later distribution from qualifying as a lump sum for NUA purposes. Special aggregation rules may also apply to related employer-sponsored plans.

How the Tax Savings From an NUA Election Are Actually Calculated

Consider employer stock worth $200,000 with a $10,000 cost basis and $190,000 in appreciation.

Assume a 35% ordinary income tax rate and a 15% long-term capital gains rate.

Tax calculation	IRA rollover and withdrawal	NUA treatment
Ordinary income tax on $10,000 basis	$3,500	$3,500
Tax on $190,000 appreciation	$66,500	$28,500
Total federal tax	$70,000	$32,000

The NUA approach produces $38,000 in potential federal tax savings under these assumptions.

This simplified example assumes the entire amount is ultimately withdrawn or sold, with no additional investment growth, state taxes or changes in applicable rates. Actual sale of property gain or loss reporting may also require distinguishing appreciation occurring before distribution from subsequent stock price changes.

When the NUA Election Makes Sense and When It Does Not

NUA treatment is generally most attractive when employer stock has a relatively low cost basis and substantial appreciation. The greater the difference between ordinary income and capital gains tax rates, the larger the potential savings.

However, several factors can reduce its advantages:

• Paying ordinary income tax on the stock’s taxable basis in the year of distribution
• Losing tax-deferred growth on shares once they are distributed from the retirement plan
• Increasing taxable income and potentially affecting Medicare premiums
• Maintaining substantial exposure to a single company’s stock
• Potentially owing the 10% additional tax on early distributions, depending on the taxpayer’s age and circumstances

Trust and Estate Planning considerations also matter because inherited NUA generally does not receive a step-up in tax basis.

The Mistakes That Disqualify an NUA Election Before It Is Made

NUA benefits can be lost through seemingly routine retirement-account transactions.

One common mistake is rolling employer stock directly into an IRA. Once the shares enter the IRA, subsequent distributions generally cannot qualify for NUA treatment.

Another is taking a partial distribution after a triggering event and attempting to complete the qualifying distribution in a later tax year without another eligible triggering event.

Other mistakes include:

• Selling or exchanging employer shares inside the plan without considering the special rules that may preserve NUA treatment in certain transactions
• Failing to distribute the applicable plan balance within one tax year
• Overlooking aggregation rules that may require related employer plans to be considered together

These mistakes can eliminate favorable tax treatment or substantially reduce its value. Participants should evaluate the complete distribution strategy before initiating a rollover or withdrawal.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Employee Benefit Plan Audit Team, or call us at 770.396.2200.

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