Company Stock in Your 401(k)
If your 401(k) holds your employer's stock that has grown a lot, you may be able to take the shares out and pay ordinary income tax only on what the plan paid for them. The growth, called net unrealized appreciation (NUA), is taxed at long-term capital gains rates when you sell, not at ordinary rates of up to 37%. On a large position, the difference can run into six figures.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Employees and retirees holding highly appreciated employer stock inside a 401(k) or other qualified plan
- People whose cost basis in the shares is low compared with today's value
- Those who have had a triggering event: separation from service, reaching age 59½, disability (self-employed only), or death
- Owners who can pay the ordinary tax on the basis from outside funds
Who it's not for
- Anyone whose employer stock has a high basis relative to market value; rolling to an IRA is usually better
- People who need to keep the whole balance tax-deferred or want to spread income over many years
- Those who already took a partial distribution after the triggering event and broke the lump-sum requirement
How it works
Normally, everything that comes out of a 401(k) is taxed as ordinary income. The NUA rule is an exception for employer securities. When the shares are distributed in kind, as shares and not cash, as part of a lump-sum distribution, you pay ordinary tax only on the plan's cost basis in those shares. The gain built up inside the plan is not taxed until you sell.
When you do sell, the NUA portion is taxed as long-term capital gain, no matter how long you hold the shares after the distribution. Any growth after the distribution date is long-term or short-term depending on how long you hold the shares from that date.
The lump-sum requirement is strict. After a triggering event, you must distribute your entire balance from all of the employer's qualified plans of the same type within one calendar year. You can send the employer stock to a taxable brokerage account and roll everything else, including cash and other funds, to an IRA in the same year. You can also roll some of the employer shares to the IRA and take only the lowest-basis lots out under NUA.
If you are under 59½ and do not qualify for an exception, the 10% early-distribution penalty applies to the taxable basis amount. Separation from service in or after the year you turn 55 is a common exception for plan distributions.
NUA shares do not get a step-up in basis at death. Heirs who inherit them still owe capital gains tax on the NUA when they sell. Keep that in mind before you decide which shares to hold and which to sell.
Illustrative example
Illustrative: a 62-year-old retires holding employer stock in her 401(k) worth $600,000 with a plan cost basis of $100,000. She is in the top bracket and uses a flat 37% ordinary rate and 20% capital gains rate for simplicity.
- NUA = $600,000 market value - $100,000 basis = $500,000
- Tax on basis at distribution: $100,000 x 37% = $37,000
- Tax on NUA when sold: $500,000 x 20% = $100,000
- Total tax using NUA: $37,000 + $100,000 = $137,000
- Alternative, roll to an IRA and withdraw it all as ordinary income: $600,000 x 37% = $222,000
- Difference: $222,000 - $137,000 = $85,000
In this illustration, using the NUA rules keeps about $85,000 more after tax, before considering the net investment income tax or the time value of deferral in an IRA.
The rules
| Rule | Citation |
|---|---|
| Net unrealized appreciation in employer securities distributed in a lump-sum distribution is excluded from income at distribution; only the plan's basis is taxed. | IRC §402(e)(4) |
| A lump-sum distribution means the entire balance from all of the employer's plans of the same type, paid within one tax year, after a triggering event. | IRC §402(e)(4)(D) |
| NUA is long-term capital gain when sold, regardless of the holding period after distribution. | IRS Notice 98-24 |
| The 10% additional tax can apply to the taxable portion if you are under 59½ and no exception applies. | IRC §72(t) |
Watch-outs
- Taking a partial distribution or required withdrawal before the lump-sum year can disqualify NUA treatment for that triggering event. Plan the timing before any money moves.
- The shares must leave the plan as shares. Selling inside the plan and distributing cash loses NUA.
- Holding a large single-stock position after distribution keeps the concentration risk. The tax result does not change the investment risk.
- Plan administrators sometimes report basis incorrectly. Check the Form 1099-R amounts before filing.
What we do
We get the cost-basis records from your plan, run NUA against an IRA rollover lot by lot, and show the after-tax cash under each path. We coordinate the timing with your financial advisor and plan administrator, and we report the distribution correctly on your return.
Questions
Do I have to take all of my employer stock out under NUA?
No. You can take out only the lowest-basis shares and roll the higher-basis shares and other assets to an IRA, as long as the whole account balance leaves the plan within the same year.
Do I have to sell the shares right away?
No. The NUA is taxed only when you sell. You can hold the shares, though growth after the distribution date follows the normal holding-period rules.
What if I already rolled everything into an IRA?
Once employer stock is rolled to an IRA, the NUA opportunity is gone for those shares. Future withdrawals from the IRA are ordinary income.