Save Taxes On Your 401K Through Net Unrealized Appreciation (NUA)
This week, I want to introduce you to a little-known but incredibly powerful tax strategy called Net Unrealized Appreciation (NUA). If you own company stock within your 401(k) and you're approaching retirement, understanding this strategy could potentially save you tens of thousands of dollars in taxes.
What Is Net Unrealized Appreciation?
Net Unrealized Appreciation (NUA) is a special tax treatment available for company stock held inside a 401(k). Most people are unaware of this option when they retire, roll over their 401(k), or even while actively managing their retirement plan.
Here’s the opportunity: instead of paying ordinary income tax when you withdraw funds (which could be as high as 37%), you can potentially pay the much lower long-term capital gains tax rate on the appreciation of your company stock. In some cases, that tax rate could be 0%.
Let’s Break It Down with an Example
Imagine you’ve been working at CVS (formerly Aetna), and over time, you've accumulated $100,000 worth of CVS stock inside your 401(k). But your original purchase price (your cost basis) was just $10,000. That means you have $90,000 of unrealized gains.
If you were to simply take that $90,000 as a normal 401(k) distribution, you’d pay ordinary income tax—maybe 22% federally, and even more if your state has an income tax.
But with NUA, you might only pay 15% capital gains tax, or even 0% if your income falls within the lower two tax brackets. That could be a tax savings of up to $24,000.
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How to Take Advantage of NUA
To use this strategy, a “triggering event” must occur:
Separation from your employer (retirement, quitting, or being laid off)
Reaching age 59½
Disability
Death (your heirs can benefit)
Let’s say your triggering event is retirement. Here’s what you’d need to do:
Roll over your 401(k). But instead of moving everything to an IRA:
Send the company stock to a brokerage account.
Roll over the rest of the 401(k) to an IRA.
The cost basis of your stock (in our example, $10,000) is taxed as ordinary income in the year of the distribution.
The gain (in our case, $90,000) will be taxed as long-term capital gains whenever you sell the stock.
Important: You must complete this rollover in a single tax year, or you risk losing the NUA tax treatment. So don’t wait until December—give yourself a few months to get it done right.
Mistakes to Avoid
Here are a few common missteps that could derail this strategy:
Not rolling over your full 401(k) balance during the year.
Selling the stock before realizing it qualifies for NUA.
Not checking the cost basis before deciding.
Also, some people cash out their stock too early, especially if the company hits a rough patch. That resets your cost basis if you repurchase the stock, potentially wiping out the NUA benefit.
And remember: owning too much of any single company’s stock carries risk. Diversifying is still key to a healthy retirement portfolio.
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What About Early Retirement?
If you’re younger than 59½ but have left your company, you can still use NUA—but the cost basis portion will be subject to a 10% early withdrawal penalty.
So in our CVS example:
A $10,000 basis = $1,000 penalty
A $100,000 basis = $10,000 penalty
That penalty might still be worth it, but it's something to weigh carefully.
That said, if you leave your job between ages 55 and 59½, many plans allow penalty-free distributions, including for NUA. Double-check your specific plan rules.
Final Thoughts: Should You Use NUA?
If you hold company stock in your 401(k), it’s absolutely worth checking what your cost basis is. You might be sitting on a valuable tax planning opportunity.
Even better: if you can keep your taxable income in a low enough bracket in retirement, you may pay 0% in capital gains. That means you can sell the stock slowly, over time, to optimize your taxes.
Pro Tip:
Capital gains stack on top of your other income. To take full advantage of the 0% rate, try to minimize other income (like Social Security or IRA distributions) in the years you sell.
If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question.
As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey
Founder & CEO of Morrissey Wealth Management
Host of the Retire with Ryan Podcast