Most people with a 401(k) assume the default playbook is to either roll the balance into an IRA or leave it in the plan. But for some, especially those with large blocks of company stock accumulated over long careers, there is a third path that can reshape your tax picture, expand your giving, and even influence your estate. It is called Net Unrealized Appreciation (NUA).
If you are a detail-oriented professional who has worked faithfully at a DFW company like Texas Instruments, Raytheon/RTX, AT&T, Kimberly-Clark, PepsiCo/Frito-Lay, or Southwest Airlines, you may be sitting on a large block of low-basis employer stock. If you are also charitably inclined, considering retirement in your mid-to-late 50s or early 60s, and wondering how to steward your wealth wisely, NUA deserves your attention.
Key Features of a Strong NUA Opportunity
NUA is not for everyone. Here’s what makes a plan a strong candidate:
Employer stock fund or ESOP where shares are matched or purchased in stock.
Long tenure with the company, leading to very low basis.
In-kind distribution allowed by the plan.
Significant appreciation in company stock value.
Good advisor/CPA coordination to avoid reporting errors.
Charitably inclined or comfortable diversifying out of concentrated stock.
If this list looks familiar, you may be a candidate.
Meet David and Susan
David, age 57, has just retired after a 30-year engineering career with Raytheon in Plano. He is proud of his work, and he likes precision and clarity in planning just as much as he liked it in engineering. His wife, Susan, age 56, raised their two kids while working part-time, and today she spends much of her time volunteering at church. They are grateful for their financial position, but also mindful of how long their parents lived, both sides into their 90s.
Their balance sheet looks like this:
$3.2M in pre-tax retirement accounts (David’s 401(k) and IRA, plus Susan’s IRA).
$750k in Raytheon stock inside David’s 401(k). His basis is only $75k.
$1M in a taxable brokerage, invested in index funds.
$700k in home equity.
Total net worth = $5.7M.
Their lifestyle goals: They have been used to ~$250k of combined income while working, and they would like ~$180k/year in retirement to maintain their lifestyle.
Their values: They tithe about $25k annually and are open to giving more substantially if the timing and strategy are right. They also want to leave a meaningful legacy to their kids, but not a tax mess.
How NUA Works for David and Susan
When David takes the $750k of Raytheon stock out of his 401(k) under the NUA rules:
He pays ordinary income tax only on the basis ($75k).
The gain portion ($675k) is not taxed until he sells, and when sold, it is always taxed at long-term capital gains rates.
Compare that to an IRA rollover: if David just rolled the whole $750k into an IRA, every dollar would eventually come out as ordinary income.
Here’s the immediate comparison:
Immediate Comparison (Distribution Year)
| Scenario | Taxable Income in Year of Distribution | Tax Treatment of Growth | Penalty Treatment |
|---|---|---|---|
| Rollover to IRA | $0 (all deferred) | All taxed later as ordinary income | No penalty if over 59½, penalty if under 59½ |
| NUA Distribution | $75,000 basis taxed as ordinary income | $675,000 later as long-term gains | No penalty on gain, basis penalty-free via Rule of 55 |
| 401(k) Withdrawals via Rule of 55 | Amount withdrawn taxed as ordinary income | No NUA benefit, taxed fully as ordinary income | No penalty if separated at 55+ from that employer |
Note: Rule of 55 withdrawals can bridge cash needs between ages 55 and 59½, but they do not receive the capital gains benefits of NUA. They are taxed fully as ordinary income, just without penalty.
Rule of 55: A Key Exception for Ages 55–59½
Because David retired at 57, he qualifies for the Rule of 55. This means:
The $75k basis under NUA is taxed as ordinary income but penalty-free.
The $675k NUA portion is always penalty-free.
To be clear, Rule of 55 only applies as an exception for those retiring between ages 55 and 59½. After 59½, the age itself removes penalties, so the Rule of 55 is no longer needed.
The Bridge Years: Harvesting Gains in the 0% Bracket
David and Susan want ~$180k/year in retirement income. Social Security is still a few years away. In these “bridge years,” their taxable income is lower than it will be later.
This creates an opportunity:
Married couples can recognize up to ~$96,700 of taxable income in 2025 and still stay in the 0% long-term capital gains bracket.
But ordinary income fills that space first. In their first year (with the $75k basis plus a $50k IRA withdrawal), almost no room remains for gains at 0%. In later years, much more of their LTCG fits at 0%.
Qualified Dividends (QD): These are dividends taxed at the same preferential rates as LTCG (0%, 15%, or 20%). Importantly, qualified dividends count toward filling the 0% bracket space before additional capital gains. That is why David and Susan’s ~$20k of dividends from their taxable account reduces how much of their stock sales can fit at 0%.
10-Year Bridge Scenario
| Year | NUA + Taxable Stock Sales (≈$110k LTCG) | Taxable Ordinary Income | Portion of Gains at 0% | Portion of Gains at 15% |
|---|---|---|---|---|
| 1 | $110k | $125k (basis + IRA + QD) | Minimal (0% bracket filled by ordinary income) | Nearly all gains taxed at 15% |
| 2–10 | $110k | $70k (IRA + QD) | Significant (roughly half or more of gains) | Remainder taxed at 15% |
Year 1 vs Later Years Tax Flow
| Ordinary Income (after deduction) | Preferential Income (QD + LTCG) | At 0% LTCG Bracket | At 15% LTCG Bracket | Approx. Federal Tax | |
|---|---|---|---|---|---|
| Year 1 (with $75k basis) | ~$93.5k | $130k | ~$0 (ordinary income uses almost all space) | ~$130k | ~$29k (~16% effective rate) |
| Years 2–10 (no basis) | ~$39k | $130k | ~$58k | ~$72k | ~$12k (~6–7% effective rate) |
Note: The 0% LTCG bracket “stacks” on top of ordinary income. Year 1 is heavier tax because of the $75k basis. In later years, once the basis is gone, more of their gains fall into 0%.
Charitable Giving: Donor-Advised Fund as a Release Valve
David and Susan already tithe $25k each year. With NUA stock, they could take a different approach.
Because appreciated stock has to be held for at least one year after distribution before it qualifies as long-term capital gain property for donation purposes, this strategy would begin in year two.
At that point, they could donate $100k of stock into a donor-advised fund (DAF).
They would avoid all capital gains tax on those shares.
Their AGI in year two would be about $180k, made up of IRA withdrawals, qualified dividends, and capital gains.
The IRS allows deductions for gifts of appreciated securities up to 30% of AGI, or about $54k in this case. That means $54k of the contribution would be deductible in year two, and the remaining ~$46k would carry forward for up to five years.
To align the tax benefit, David and Susan could pair this gift with a $54k Roth conversion in year two and another $46k Roth conversion in year three, roughly matching the timing of the deductions. Each year’s conversion would be offset by the DAF deduction, using both the current-year limit and the carryforward from the initial gift.
The DAF still allows them to spread the giving to their church and other causes over many years, while the Roth conversions reduce their pre-tax balance and future RMDs.
Note: Charitable donations and Roth conversions have their own reporting rules, separate from the NUA paperwork discussed later.
Estate and Diversification Decisions
This is where most discussions of NUA fall short. For David and Susan, the question is not just whether to use NUA, it is what to do with the shares once they are in hand.
Choice 1: Hold the shares
Pros: Defers realizing capital gains, retains upside if stock rises.
Cons: Concentration risk, no step-up on NUA portion at death, heirs inherit the original $75k basis.
Choice 2: Sell for bridge income
Pros: Can harvest at 0% LTCG bracket (in later years), provides efficient retirement income, reduces concentration risk.
Cons: Gains are realized now, so less upside if stock continues rising.
Choice 3: Gift to DAF or charity
Pros: Deduction for FMV, no capital gains ever recognized, reduces estate size, aligns with generosity goals.
Cons: Shares are permanently removed from family wealth.
Heirs’ Scenario under SECURE Act
| Scenario | Heirs’ Tax Treatment |
|---|---|
| All in IRA | Must withdraw all within 10 years, fully taxed as ordinary income |
| NUA Stock (Original $75k basis) | Inherit at original $75k basis (no step-up), pay LTCG on $675k appreciation |
| Post-Distribution Growth | If held until death, growth after distribution receives step-up, heirs avoid tax |
Tax Reporting: Soup to Nuts
Here is how the NUA stock transaction actually reports:
Form 1099-R (retirement distribution)
Box 1: $750,000 (total distribution).
Box 2a: $75,000 (basis, taxable as income).
Box 6: $675,000 (NUA).
Only the $75k is taxed as income this year. If you do not clearly flag the NUA transaction to your CPA, it is easy for Box 6 on the 1099-R to be overlooked. That could cause the full distribution to be mistakenly reported as taxable. Even good CPAs can miss this detail if they are not alerted.
Form 1099-B (brokerage sale)
When stock is sold, shows proceeds and cost basis.
If not adjusted, it may show $0 basis, which would double-tax the sale.
Schedule D / Form 8949 (capital gains)
Reconciles the sale.
NUA portion = always long-term gain.
Post-distribution growth = short- or long-term depending on holding period.
Form 1040 (main return)
$75k basis flows into income in the distribution year.
Gains flow later as sales occur.
Note: The reporting above is specific to NUA. Charitable donations and Roth conversions are reported separately.
Practical heads-up: Company stock typically first lands with the transfer agent (like Computershare), not your brokerage. You then complete a Transfer of Assets request to move it. This is normal and does not affect tax treatment, but it can surprise people if they do not expect it.
Bringing It Together
For David and Susan:
Retire at 57.
Use NUA to move $750k stock out. Pay tax on $75k basis in year one, no penalty.
Harvest ~$60k/year in LTCG, taxed partly at 0% and partly at 15%.
In year two, donate $100k of appreciated stock into a donor-advised fund. Deduct ~$54k that year, carry forward the balance, and pair it with a $54k Roth conversion.
In year three, use the carryforward deduction to offset another $46k Roth conversion.
Enter traditional retirement with lower RMDs, more charitable impact, and heirs facing a lighter tax burden.
This is not just tax gymnastics. It is stewardship, aligning wealth with purpose and clarity.
Appendix: Planning Notes
For the detail-minded, here are additional points:
IRC authority: §72(t)(2)(A)(vi) exempts NUA from early withdrawal penalty. Pub 575 explains basis vs. NUA reporting.
Triggering events: Separation from service, disability, death, or reaching 59½. Must take a full lump-sum distribution.
Partial withdrawals: Can disqualify NUA eligibility. Plan carefully before taking distributions.
Charitable gifts: Stock donations >$500 require Form 8283. Over $5,000 require acknowledgment/appraisal rules.
Step-up detail: No step-up on NUA portion, but post-distribution growth does receive step-up at death.
Common pitfalls: Not flagging NUA to your CPA, CPAs missing Box 6 of the 1099-R, brokers reporting wrong basis on 1099-B, forgetting to adjust Schedule D.
Concentration risk: Consider staggered sales or hedging strategies if employer stock remains a large share of net worth.
Appendix Note: Charitable Deduction Limits
When donating to a public charity or donor-advised fund (DAF), the IRS limits how much you can deduct in a single year based on your Adjusted Gross Income (AGI):
Cash contributions: deductible up to 60% of AGI
Appreciated securities (like NUA stock): deductible up to 30% of AGI
Carryforward rule: If your gift exceeds these limits, the unused deduction can be carried forward for up to five additional years
Note: Beginning in 2026, the One Big Beautiful Bill Act (OBBBA) introduces new rules that affect charitable deductions. Gifts of appreciated stock to a DAF will still be subject to the 30% of AGI limit, but deductions overall will be reduced by a new 0.5% of AGI floor, and the tax benefit for high-income households may be capped at 35%. These changes do not eliminate the opportunity, but they add another layer of planning for larger gifts.
About Weston Haaf, CFP®
Weston Haaf is the founder of Vantage Wealth Management and a CERTIFIED FINANCIAL PLANNER™ professional. He helps quietly successful couples—typically between $1 million and $15 million+ in assets—navigate retirement, tax strategy, and major financial transitions with clarity and purpose. Weston lives in Sunnyvale, TX, and believes great planning is as much about values and relationships as it is about numbers.
This post is for informational purposes only and is not intended as personalized financial, tax, or legal advice. Vantage Wealth Management is a registered investment advisor in the state of Texas. Registration does not imply any level of skill or training. Always consult with a qualified professional before making decisions based on this content.