How to Cut Taxes on Company Stock in Your 401(k) with the NUA Strategy

How to Cut Taxes on Company Stock in Your 401(k) with the NUA Strategy

If you’ve worked for the same company for years, chances are you’ve built up company stock inside your 401(k). Most people assume that when it’s time to withdraw those funds, every dollar will be taxed as ordinary income. That’s usually true — but there’s a lesser-known IRS rule called Net Unrealized Appreciation (NUA) that could cut your tax bill significantly.

When used correctly, NUA can reclassify part of your withdrawal from higher-tax ordinary income to lower-tax long-term capital gains — putting more money in your pocket during retirement.

What Is Net Unrealized Appreciation?

In plain English, NUA is the difference between what your company stock cost inside your 401(k) (the “cost basis”) and what it’s worth today. Under normal rules, all 401(k) withdrawals are taxed as ordinary income, no matter what’s inside the account.

NUA offers an exception:

• You pay ordinary income tax only on the cost basis.
• You pay long-term capital gains tax on the growth when you sell the stock — even if you sell right away.

Because long-term capital gains tax rates (0%, 15%, or 20% federally) are often lower than ordinary income rates (which can be as high as 37%), the savings can be substantial.

How the NUA Strategy Works

To use NUA, you must:

1. Have employer stock in your 401(k).
2. Experience a “triggering event” such as leaving your job, turning 59½, disability, or death.
3. Take a lump-sum distribution of your entire 401(k) in the same calendar year — with the company stock moved into a taxable brokerage account and the rest rolled into an IRA.

Once in the taxable account:

• The cost basis portion is taxed as ordinary income in that year.
• The NUA portion (the growth) is taxed as long-term capital gains when sold.

Why NUA Can Make Sense

NUA is most powerful when:

• The stock has appreciated significantly.
• You’re in or expect to be in a high ordinary income tax bracket.
• You plan to diversify out of company stock soon after distribution.

It may be less useful if:

• The stock has little growth.
• Your ordinary income rate is already low.
• You want to keep the stock inside a tax-deferred account for decades.

NUA in Action: A Real-World Example

Let’s say you have $200,000 of company stock in your 401(k).

• Cost Basis: $40,000
• Growth (NUA): $160,000
• Ordinary Income Tax Rate: 32%
• Long-Term Capital Gains Tax Rate: 15%

Standard Withdrawal

• All $200,000 taxed as ordinary income.
• Tax bill = $64,000.
• After-tax amount = $136,000.

NUA Strategy

• Pay ordinary income tax on $40,000 cost basis = $12,800.
• Pay long-term capital gains tax on $160,000 growth = $24,000.
• Total tax = $36,800.
• After-tax amount = $163,200.

Tax Savings: $27,200 — just from structuring the distribution differently.

Bottom Line

Net Unrealized Appreciation is an advanced tax strategy that can save retirees tens of thousands of dollars — but it’s not a one-size-fits-all move. The rules are strict, the timing matters, and the tax implications can be complex.

At Strategic Wealth Partners, we help clients evaluate whether NUA makes sense as part of their broader retirement and tax planning strategy. If you have company stock in your 401(k) and want to explore this opportunity, let’s talk.

Schedule a meeting today and see how a single tax move could make a major difference in your retirement income.