Net Unrealized Appreciation: The Company-Stock Tax Break a 401(k) Rollover Can Erase

If your 401(k) holds appreciated company stock, a lump-sum distribution moves those shares to a taxable account and you pay ordinary tax now only on the plan’s cost basis. The appreciation gets long-term capital gain rates, as low as 0% up to $49,450 of 2026 taxable income (single). Roll it to an IRA first and that break is gone.

The decision you don’t know you’re making when you “just roll it over”

Two things are tangled in the rollover paperwork, and only one of them is obvious.

The obvious one is where the money goes. The 401(k) is leaving the employer’s plan, and the default advice is to roll the whole balance to an IRA so it keeps deferring. For most of the balance, that is fine.

The one that gets missed is the company stock sitting inside the plan. If it has appreciated, it has its own tax door, and that door closes the moment the shares land in an IRA. This is net unrealized appreciation, NUA, and it is written into Internal Revenue Code section 402(e)(4). Keep in mind it only exists for employer stock held inside a qualified plan, not for shares you already hold in a brokerage account.

What NUA actually does to the tax bill

Start with two numbers on those shares. One, what the plan paid for them, the cost basis. Two, what they are worth the day they come out. The difference is the net unrealized appreciation.

Take a qualifying lump-sum distribution and move the shares in kind to a taxable brokerage account, and you pay ordinary income tax now on the cost basis only. The appreciation is not taxed yet. Per IRS Topic No. 412, Lump-Sum Distributions, “the NUA is generally not subject to tax until you sell the securities.”

When you do sell, the NUA is taxed as a long-term capital gain, no matter how soon you sell. That is the whole point. The gain that would have been ordinary income coming out of an IRA is instead taxed at the long-term rate, and you control the timing of the sale.

The plan tracks that basis and reports the NUA figure in box 6 of your Form 1099-R, per IRS Publication 575 (2025), Pension and Annuity Income. So this is not a number you estimate. It is a number the plan hands you.

The 2026 numbers, side by side

Long-term capital gain rates in 2026 run 0%, 15%, or 20%, set by where your total taxable income lands. Per IRS Revenue Procedure 2025-32, section 3.03, for tax year 2026 the 0% rate covers taxable income up to $49,450 single and $98,900 for married couples filing jointly. The 15% rate runs up to $545,500 single and $613,700 joint, and above those the rate is 20%.

Roll the same shares into an IRA and none of that applies to the appreciation. Every dollar comes out as ordinary income on withdrawal, at whatever your bracket is that year, for the rest of the account’s life and your heirs’ too.

The company shares, at a qualifying event	NUA: in-kind lump-sum to a taxable account	Full rollover to an IRA
Cost basis (what the plan paid)	Ordinary income tax now, on the basis only	No tax now, deferred inside the IRA
The appreciation (the NUA) when you sell	Long-term capital gain rate: 0% up to $49,450 single / $98,900 joint, 15% up to $545,500 / $613,700, then 20% (2026)	Ordinary income on withdrawal, at your bracket that year
Growth after the shares leave the plan	Short- or long-term gain by your own holding period from distribution	Ordinary income on withdrawal
If shares pass to heirs	The NUA is income in respect of a decedent, no step-up on that piece; growth above the NUA after distribution can step up	No step-up; heirs pay ordinary income on withdrawals
Distribution taken before age 59½	10% additional tax can apply to the taxable basis (IRS Topic No. 558)	10% additional tax can apply to amounts withdrawn early

Sources: IRS Topic No. 412, Lump-Sum Distributions and IRS Publication 575 (2025) (NUA mechanics and cost-basis treatment); IRS Revenue Procedure 2025-32, section 3.03, tax year 2026 (long-term capital gain thresholds). Estate treatment is a general rule; confirm your own situation with a CPA or estate attorney.

The trigger is a lump-sum distribution in one tax year

NUA is not a box you check later. It runs off a specific event, and the timing is strict.

Per IRS Topic No. 412, a lump-sum distribution is your entire balance from one kind of the employer’s plan, paid within a single tax year, after one of four triggers: separation from service, reaching age 59½, death, or disability. Miss the single-year window, or take a partial distribution first, and the lump-sum treatment can be blown for the year.

Here is the part that costs people the option. Roll the 401(k) to an IRA and then notice the company stock, and it is too late. The shares are IRA assets now, and the NUA election is gone. The separation-at-55 rule works the same way, an in-plan right that does not survive the move to an IRA.

So the order matters. Once the rollover is done, the door is shut. That is why the company stock has to be looked at before the “just roll it over” step, not after, the same trap covered in Old 401(k) and IRA Review.

Where this shows up in San Diego

This is a long-tenure problem. It shows up for people who have been at one employer for fifteen or twenty years and had company stock accumulating inside the plan the whole time.

In San Diego that is aerospace and defense, the utilities, and the legacy tech names, where a 401(k) or stock bonus plan has held employer shares that were bought cheap years ago and are now worth many times the basis. If your plan holds a company-stock fund and you are about to retire or leave, this is a question to answer before you sign the rollover form, not a detail to clean up after.

Whether NUA beats a rollover is not automatic, and anyone who tells you it always wins is skipping the math. NUA tends to help when the cost basis is low relative to the appreciation, because you are paying ordinary tax now on a small number to move a large gain to capital-gain rates. If the basis is high, or you do not need the shares and would rather keep deferring, the plain rollover can be the better answer. The condition decides it, not the headline.

What to confirm before you touch the 401(k)

Four things, in order, and the last one is the irreversible one.

First, ask the plan for the cost basis of the company stock and the current market value. The gap between them is what is at stake. If the basis is a large share of the value, the case for NUA is weaker, and that is worth knowing before anything else.

Second, confirm with your CPA or tax advisor what paying ordinary tax on the basis this year does to your bracket, especially in a year you also have severance or a final vest landing.

Third, if you are under 59½, evaluate the 10% additional tax on the taxable basis with your advisor, per IRS Topic No. 558. It applies to the basis you recognize, not the appreciation, but it still belongs in the arithmetic.

Fourth, before you authorize any rollover, decide the company stock separately from the rest of the balance. The rest can roll. The shares are the piece where the sequence cannot be undone.

None of that tells you which way to go, and it is not meant to. Two people at the same employer with the same job title land in different places on this, and the input that usually decides it is the basis-to-appreciation ratio, which is specific to your shares. Your CPA or tax advisor is the one who can price it against your actual return. This is education, not tax advice.

The company-stock decision does not sit by itself either. It stacks against the deferral election, the final vest, and the withholding call that all land in the same separation quarter, which is the coordination the Equity Compensation at Separation page is built around. If it would help to walk through it, a complimentary review can be scheduled here.

Questions that come up

What is net unrealized appreciation (NUA)?

Net unrealized appreciation is the growth in employer stock held inside a qualified plan, measured as the market value at distribution minus the plan's cost basis. In a qualifying lump-sum distribution you pay ordinary tax on the cost basis now, and the NUA is taxed as long-term capital gain when you sell.

Does rolling my 401(k) to an IRA cancel the NUA tax break?

Yes. NUA treatment requires the employer shares to leave the plan as part of a lump-sum distribution. Once the shares are rolled into an IRA, the appreciation becomes ordinary income on withdrawal, and the NUA option is gone permanently.

What counts as a lump-sum distribution for NUA?

Per IRS Topic No. 412, a lump-sum distribution is your entire balance from one kind of the employer's plan, paid in a single tax year, after a triggering event: separation from service, reaching age 59 1/2, death, or disability.

Do I have to sell the company stock right away to get long-term capital gain treatment?

No. Once the shares are distributed in kind under the NUA rules, the NUA is taxed at long-term capital gain rates when you sell, no matter how soon you sell. Any additional gain after the distribution follows normal short- or long-term holding period rules.

Is NUA always better than rolling to an IRA?

No. NUA usually helps when the cost basis is low relative to the appreciation. If the basis is high, or you do not need the shares and want continued deferral, a rollover can win. Confirm the math with your CPA or tax advisor.

If it would help to run your own numbers

BAS Financial works with San Diego high earners on exactly this fork, where the company stock inside a 401(k) has a hard trigger and the rollover form quietly forecloses the option. The Equity Compensation at Separation page covers how the pieces get sequenced, and what an engagement costs is discussed during a complimentary review.

What is the cost basis on the company stock in your plan, and have you asked before the rollover form is in front of you?