Net Unrealized Appreciation (NUA)
NUA Tax Treatment & Strategies
Written by Rocky Mengle, Attorney • Reviewed by Miguel Burgos, CPA
Updated for Tax Year 2025 • August 3, 2026
“The tax rules for net unrealized appreciation (NUA) can save you money if you have company stock in your 401(k) or other employer-sponsored retirement plan. NUA is basically the increased value of the stock from the time it’s added to your retirement plan to the time you leave your job. The rules let you defer tax on any NUA, and lower the tax rate when you eventually sell the stock.”
“The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process.”
Net unrealized appreciation (NUA) refers to the increase in value of employer stock held within an employer-sponsored retirement plan, such as a 401(k) plan. It’s equal to the difference between the stock’s initial purchase price (cost basis) and its value when distributed to the employee.
When taking company stock out of a 401(k) or other employer-sponsored retirement plan, you can defer taxes on the NUA portion of your distribution until the stock is sold. At that point, the NUA is taxed at long-term capital gains rates. However, your cost basis in the stock is taxed as ordinary income for the year of the distribution.
To take advantage of NUA tax rules, you must take a lump-sum distribution, which involves withdrawing all your company stock from all employer-sponsored retirement plans of the same type in a single tax year. The lump-sum distribution must also be taken because you leave the job, reach age 59½, become disabled, or die.
You can opt out of the NUA rules. However, it’s best to consult with a tax professional or financial advisor before deciding whether to opt out or follow the NUA tax rules.
Example:
Yes. NUA can create a substantial tax advantage when highly appreciated employer stock is held inside your 401(k). The key is that the original cost basis is taxed as ordinary income, while the NUA (the appreciation that occurred inside the 401(k)) is generally taxed as long-term capital gain when you eventually sell the stock.
At age 59½+ and separating from your employer, you can potentially meet the lump-sum-distribution requirements for NUA treatment.
Example: $230,000 of company stock
The critical number I need from your 401(k) statement is the cost basis of the $230,000. So let’s illustrate with a plausible example:
NUA strategy
Roll to IRA / ordinary-income treatment
Employer stock value
$230,000
$230,000
Assumed original cost basis
$50,000
$230,000
NUA
$180,000
—
Tax when distributed
$50,000 ordinary income
$230,000 ordinary income
Tax on $180,000 appreciation
Long-term capital gain when sold
Ordinary income when eventually withdrawn
Additional tax advantage
Potentially substantial
None
The NUA strategy does not make the $180,000 appreciation tax-free. It changes the character of that appreciation from ordinary income to long-term capital gain.
Rough federal tax comparison
Suppose, just for illustration, that your marginal federal ordinary-income rate is 24% and the applicable long-term capital-gains rate is 15%.
Without NUA:
$230,000 × 24% = $55,200
With NUA:
$50,000 basis × 24% = $12,000
$180,000 NUA × 15% = $27,000
Total = $39,000
Illustrative federal tax savings = ~$16,200
And there is an important additional benefit: the $180,000 NUA isn’t necessarily taxed in the year you leave the company. The NUA tax generally occurs when you sell the employer securities.
But California changes the calculation
This is particularly important for you because you’re a California resident.
California does not provide a preferential capital-gains rate. California taxes capital gains as ordinary income.
Therefore, the big NUA advantage for you is primarily the federal difference between ordinary-income and long-term-capital-gain taxation. The California benefit may be much smaller or nonexistent depending on your California marginal rate.
There’s also a potential 3.8% federal Net Investment Income Tax (NIIT) issue depending on your MAGI and circumstances; NUA itself receives special treatment under the NIIT rules.
One particularly important point for you
Since you’re leaving Abbott around age 60, don’t automatically roll the entire 401(k) to an IRA before investigating NUA.
If you execute the NUA transaction correctly, the typical structure is:
Distribute the employer stock in kind from the 401(k) into a taxable brokerage account.
Roll the remaining non-employer-stock portion of the 401(k) to an IRA, if desired.
Pay ordinary income tax on the cost basis of the employer stock.
Keep the employer stock in the taxable account.
When you sell it, the accumulated NUA is generally long-term capital gain.
Any appreciation after the stock leaves the 401(k) is generally capital gain based on how long you hold it.
There are strict NUA/lump-sum-distribution rules, so the transaction should be coordinated with the 401(k) administrator and your tax professional.
If you give me the actual cost basis of your $230,000 Abbott stock—for example, “$230K value, $72K basis”—I can calculate the Federal + California tax savings under NUA versus rolling the stock into an IRA, using your expected 2027 retirement income and your likely tax bracket. That would give you a much more realistic number than the generic $16,200 example.