He Was About to Roll $1.2 Million Into an IRA. That Move Would Have Cost Him $360,000 in Unnecessary Taxes.
A client of mine was getting ready to retire. He wanted to work part-time at a golf course, slow things down, enjoy the next chapter.
He’d saved $1.2 million over his career, and two-thirds of it, about $800,000 was sitting in one place: his employer’s stock, inside his 401(k).
He was concerned with having so much of his retirement in one stock, and he was thinking through how much stock to keep, without realizing there was an opportunity to save a lot of money in taxes as well.
The Move Most People Never Hear About
When people retire, they often leave their funds in the 401k or roll everything into an IRA.
But company stock is different. There’s a lesser-known IRS rule, called Net Unrealized Appreciation (NUA), that lets you move employer stock out of a 401(k) and into a regular brokerage account instead of an IRA. The tax treatment is completely different.
Here’s why that matters: when stock comes out this way, you only pay ordinary income tax on what you originally paid for it, the cost basis. Everything the stock has gained since then is taxed later, when you sell it, at long-term capital gains rates instead of ordinary income rates.
That’s a meaningful difference. Long-term capital gains rates top out well below the top ordinary income rate, and for some people, there’s a bracket where long-term gains are taxed at 0% federally.
What This Looked Like in Practice
In his case, we moved $400,000 of the stock out via NUA. His original cost basis on those shares was $40,000, that’s the amount taxed as ordinary income in the year of the distribution. The remaining $360,000 was appreciation, and it moved with him at long-term capital gains treatment instead.
The rest of his 401(k), including the remaining company stock he planned to sell and diversify, rolled into an IRA, where it remained tax-deferred.
He began drawing from the brokerage account deliberately, a little at a time, staying under the income thresholds where long-term capital gains are federally tax-free. Done carefully, that $360,000 of appreciation could be realized without owing federal tax on it at all.
I want to point something out about the last part: staying inside the 0% capital gains bracket isn’t realistic for everyone. Social Security, pension income, RMDs from other accounts, or part-time work can all push a retiree’s income above that threshold. In his case, it worked because he had the flexibility to manage his income carefully in the years he planned to sell. For someone with more fixed income sources, the benefit might look more like paying 15% on that appreciation instead of 0%, but in the right circumstances still a significant improvement over ordinary income rates, just not a tax-free outcome.
Why This Isn’t More Widely Known
NUA doesn’t come up for most people because most people don’t have significant employer stock in a 401(k) to begin with. It also only applies in specific circumstances:
- The stock has to come out as part of a lump-sum distribution, the entire balance of the plan, in one tax year
- A triggering event needs to occur: leaving the job, turning 59½, disability, or death
- If you’re under 59½ and separating from service before age 55, the cost-basis portion may be subject to a 10% early withdrawal penalty
- It’s not all-or-nothing. The full plan balance has to be distributed in that one tax year, but you decide how much of the stock to elect NUA treatment on and how much to roll into an IRA instead, which is exactly what happened above: $400,000 went the NUA route, the rest rolled over.
- Once you roll money out of the 401k, the NUA opportunity is gone for good, it’s a one-time, irreversible decision
That last point is the one that trips people up. The default rollover path closes this door permanently. There’s no going back and undoing it a year later once you realize what you gave up.
It’s Not Right for Everyone
NUA isn’t a strategy to force into every situation, and it isn’t always available even when it looks like it should be.
Timing can close the door before you know it’s open. The lump-sum requirement means the entire plan balance has to come out within one tax year, tied to the same triggering event, retirement, turning 59½, disability, or death. If you’ve already taken a distribution since separating from your employer, that window may already be closed. For example, retired in 2024, took a distribution in 2025, and it’s now 2026? The lump-sum election for that original triggering event may no longer be available.
It generally works best when you’re prepared to hold the stock for some period after the distribution, not liquidate it immediately. Picture the same client moving $400,000 of stock into a brokerage account and turning around and selling all of it right away. He’d realize the full $360,000 of appreciation as a capital gain in a single year, on top of the $40,000 of ordinary income. Even if that still comes out ahead of ordinary income tax rates over time, a tax bill of that size in one year can be uncomfortable, and depending on his other income that year, the actual savings could end up smaller than expected, or disappear entirely.
The point isn’t that NUA is automatically the right answer, it’s that it deserves to be part of the conversation before the rollover happens, and that the details of your specific timeline and plans matter as much as the strategy itself.
If You’re Facing This Decision
If you’re approaching retirement or a job change and have company stock built up in a 401(k), it’s worth having someone look at the numbers before you roll anything over. This is a one-time decision with no do-overs, and the difference between the default path and the right path can be substantial.
I’m happy to walk through what this could look like for your specific situation. Even if it looks like a good fit, confirm the details with your plan custodian directly, eligibility depends on timing, and it’s worth verifying your account still qualifies before assuming it does.
For a broader look at how this fits alongside other strategies high-net-worth individuals use to legally reduce their tax bill, watch the full video here:
