When leaving a job, most people are told to roll their 401(k) into an IRA.

And in many cases, that’s the right move—it keeps your money growing tax-deferred and gives you more control.

But if your 401(k) includes company stock, there’s an alternative strategy worth considering—one that could significantly reduce your long-term tax burden.

A Different Approach to Consider

If your retirement plan holds appreciated employer stock and you take a lump-sum distribution, you may want to:

• Transfer the company stock into a taxable brokerage account
• Pay tax only on the original cost of the shares
• Roll the remaining balance into an IRA (tax-free)

This type of decision should be evaluated as part of a broader tax and financial strategy. Our team provides outsourced accounting and CFO services to help business owners make informed decisions around cash flow, taxes, and long-term planning.

Tax advisors call this Net Unrealized Appreciation (NUA).

How the NUA Strategy Works

When you use the NUA strategy:

• You pay ordinary income tax only on the plan’s cost basis (what the stock was worth when purchased inside the plan)
• The growth (NUA) is not taxed immediately
• Instead, it’s taxed later at lower long-term capital gains rates

💡 Important: If you’re under age 55, the IRS applies a 10% early withdrawal penalty—but only to the cost basis, not the full value of the stock.

Why This Can Be Tax-Advantageous

This strategy can create meaningful tax savings:

1. Lower Tax Rates on Gains

The appreciation in your company stock taxes apply later at lower capital gains rates (typically 15–20%), rather than ordinary income rates (up to 37%).

2. Tax Deferral

You won’t pay tax on the gains until you sell the stock, giving you more control over timing.

3. Additional Growth Benefits

Any increase in value after the transfer to your brokerage account can also qualify for long-term capital gains treatment (if held for more than one year).

4. Estate Planning Advantages

If you hold the stock until death, your heirs may receive a step-up in basis on post-distribution gains.

Example: How It Works in Practice

Let’s say you leave your job at age 50 and receive:

• $200,000 in cash
• $100,000 in company stock
• Cost basis of the stock: $10,000

That means:

• $90,000 = Net Unrealized Appreciation (NUA)

If you:

• Roll the cash into an IRA
• Transfer the stock to a brokerage account

You’ll pay tax only on the $10,000 cost basis (plus a possible 10% penalty).

At a 24% tax rate, your immediate tax cost would be about $3,400.

Meanwhile:

• The $90,000 of appreciation is deferred
• And taxed later at lower capital gains rates

What If the Stock Declines?

If you later sell the stock for less than its value at distribution:

• Your taxable gain is limited to the actual gain realized, not the original NUA

This can help reduce downside risk from a tax perspective.

When the NUA Strategy May Not Apply

If company stock is distributed outside of a lump-sum distribution, the tax treatment changes:

• The full fair market value is taxed as ordinary income
• Only future gains may qualify for capital gains treatment

There are also special rules if the stock was purchased with after-tax contributions.

What Qualifies as a Lump-Sum Distribution?

To qualify for NUA treatment, you must:

• Receive the entire balance of the plan
• Do so within a single calendar year
• Trigger the distribution due to:
  • Leaving your job
  • Reaching age 59½
  • Death

Multiple payments are allowed—as long as they occur in the same year.

The Big Picture

Rolling your 401(k) into an IRA is often the default—but not always the most tax-efficient choice.

If your plan includes appreciated company stock, the NUA strategy may allow you to:

Reduce your overall tax burden
Take advantage of lower capital gains rates
Maintain more control over when taxes are paid

Because the tax implications can vary significantly, it’s important to work with an experienced advisor. Learn more about our tax planning and advisory services.

Final Thought

This is a nuanced strategy with a lot of moving parts.

Before making a decision, it’s important to evaluate how it fits into your broader financial picture.

 

For more insights like this, explore our latest articles on tax strategies, financial planning, and business advisory.