Net Unrealized Appreciation (NUA) is a tax provision that may reduce taxes when employer stock is taken in-kind from a qualified retirement plan after a triggering event. Instead of treating the entire value of the stock as ordinary income at distribution, only the plan’s cost basis is taxed then. The built-in gain—the NUA—can be taxed later at long-term capital gains rates when the shares are sold. This approach can be powerful but is highly conditional, and it is irrevocable once executed.

Financial management: how NUA works

To use NUA, employer securities must be distributed in-kind from a qualified plan (such as a 401(k), profit-sharing plan, or ESOP) after a triggering event: separation from service, reaching age 59½, death, or disability (for self-employed individuals). The distribution must qualify as a lump-sum distribution, meaning the entire balance of all like plans with the employer is distributed within one tax year. At distribution, the plan’s cost basis in the employer shares is taxed as ordinary income. The NUA portion is not taxed until the shares are sold, and then it is taxed as long-term capital gains regardless of the post-distribution holding period. Any additional appreciation after distribution is taxed based on the actual holding period after receipt.

If employer stock is rolled into an IRA, NUA treatment is lost permanently for those shares. It is possible to distribute some lots in-kind for NUA and roll over other assets to an IRA, provided the lump-sum rules are met and all balances of the employer’s plans are brought to zero by year-end. Prior partial distributions after a triggering event may disqualify NUA until a new triggering event occurs. State taxes and the 3.8% net investment income tax may also apply. The 10% early distribution penalty can apply to the cost-basis amount if you are under 59½ and no exception applies; exceptions (such as separation from service at age 55 or later for a 401(k)) may reduce penalties.

Investment strategies: when to use NUA

NUA can be advantageous when the spread between the stock’s current market value and the plan’s cost basis is large, the current-year ordinary income impact of the basis is manageable, and the taxpayer expects favorable capital gains treatment later. It may be less attractive when the cost basis is high relative to market value, when you plan to sell shares immediately (eliminating the deferral benefit), or if you need the diversification benefits of liquidating within the IRA. Because capital gains rates and brackets differ from ordinary income rates, modeling scenarios—such as selling across multiple tax years or pairing gains with capital losses—can clarify outcomes.

Lot selection matters. Many plans track multiple acquisition lots with different bases. Electing to distribute only low-basis shares can maximize the NUA component and minimize the ordinary income recognized at distribution. After distribution to a taxable account, you can sell gradually to manage capital gains and concentration risk, or donate appreciated shares to qualified charities to potentially avoid capital gains while claiming a charitable deduction (subject to limits).

Insurance coverage: managing concentration risk

Holding a large single-stock position creates concentration risk. After an NUA distribution, some investors spread sales over time to reduce volatility while managing tax brackets. Consider operational safeguards for the taxable account holding the shares: most U.S. brokerages provide SIPC protection up to $500,000 for securities (including up to $250,000 for cash), which guards against broker failure but not market loss. Umbrella liability policies and, where appropriate, life or disability insurance can be part of a broader risk framework that supports dependents if market conditions turn unfavorable during a staged liquidation. These protections complement, but do not replace, prudent diversification.

Business loans: liquidity and collateral considerations

Once employer shares are distributed to a taxable account, some individuals consider securities-based lines of credit for short-term liquidity rather than immediate sales that trigger capital gains. This can introduce collateral and margin-call risk if the stock declines. Using retirement plan assets as collateral while they remain in the plan is prohibited; after distribution, normal lending rules apply but carry market risk. If you anticipate needing near-term cash for business loans or other obligations, quantify whether partial sales, a diversified borrowing base, or waiting to meet a different triggering event (for eligibility) leads to better overall outcomes. Avoid decisions driven solely by short-term financing needs when they compromise long-term tax efficiency and portfolio resilience.

Wealth planning: tax timing and estate choices

NUA interacts with estate planning in distinctive ways. The NUA component does not receive a step-up in basis at death; beneficiaries inheriting the shares will still owe capital gains on the NUA portion when they sell. However, appreciation after the stock left the plan and was held in the taxable account may be eligible for a step-up if the shares are still owned at death. This nuance means that distributing only select low-basis lots and selling higher-basis shares earlier can align with wealth planning goals. Coordinating NUA with charitable gifting strategies, qualified charitable distributions from IRAs for other assets, or timing sales to years with lower income can fine-tune results.

Key operational checkpoints help avoid mistakes: confirm the distribution qualifies as a lump-sum; request in-kind delivery of employer shares to a taxable brokerage account; verify lot-level cost basis records from the plan; and decide which remaining assets, if any, will roll to an IRA. Keep detailed documentation of basis, NUA amounts, and subsequent sales to support accurate tax reporting. Because elections are irreversible and rules are technical, careful planning before initiating any distribution is essential.

Conclusion NUA can turn embedded gains in employer stock into a tax-efficient opportunity, but only when eligibility rules are met and the broader financial picture is considered. Evaluating concentration risk, expected holding periods, and future tax brackets—alongside liquidity needs and estate objectives—helps determine whether NUA or a traditional rollover better fits long-term goals.