He Has $400,000 of His Company’s Stock Inside His 401(k). Roll It to an IRA and Every Dollar Comes Out Taxed as Income. Move the Shares to a Brokerage Account Instead and the Growth Gets Capital Gains Rates

A retiree leaving his job with $400,000 of his employer’s stock in his 401(k) usually does the standard thing: roll the whole balance into an IRA. That move turns every dollar of the company stock into future ordinary income. A rule called net unrealized appreciation (NUA), which taxes the growth in employer shares while they sat in the plan, gives him another option. He can move those shares to a regular brokerage account and pay long-term capital gains rates on the growth. Households ages 55 to 69 hold 49.5% of all defined contribution retirement assets, so many people near retirement face this choice.

How Company Shares Get Capital Gains Treatment

Employer shares can leave the plan in kind, meaning the plan transfers the shares themselves. When they do, only the plan’s cost basis (what the plan originally paid for them) counts as ordinary income that year. The growth above that basis goes untaxed until you sell. When you sell, it’s taxed as long-term capital gain no matter how soon. Any gain after the distribution date is long-term or short-term depending on how long you hold the shares afterward. If the same shares go into an IRA, that split disappears. Every withdrawal gets taxed at ordinary rates, and the top ordinary rate is 37% in 2026.

Where the Rule Sits in the Tax Code

The rule is 26 U.S.C. § 402(e)(4)(B), which excludes from gross income the NUA in employer securities that are part of a lump-sum distribution. IRS Publication 575 says the NUA, shown in box 6 of Form 1099-R, “is generally tax-free until you sell or exchange the securities.” Under 26 U.S.C. § 1(h)(1), long-term gains are taxed at 0%, 15%, or 20%.

Strict Conditions Decide Who Qualifies

The payout has to be a lump-sum distribution. That means the entire balance, paid within one taxable year, from all employer plans of the same kind. All profit-sharing plans, 401(k)s included, count as a single plan. The caveat is that a triggering event must occur first. The qualifying events are death, reaching age 59½, separation from service for employees, and total and permanent disability for self-employed people. You lose the treatment if the shares are sold inside the plan or rolled into an IRA.

Steps to Split the Account in One Year

1. Confirm that a triggering event has occurred, then request a full payout within a single tax year.
2. Have the plan transfer the employer shares in kind to a taxable brokerage account.
3. Roll everything else directly into an IRA in the same year, where it stays tax-deferred.
4. Pay ordinary income tax on the cost basis. If you’re under 59½ and didn’t leave your job after age 55, you also pay a 10% additional tax. That tax applies only to the amount included in gross income, so it hits the basis and leaves the NUA alone.
5. Sell whenever you choose, paying long-term capital gains rates on the NUA.

When NUA Saves Money and When It Doesn’t

The table below assumes $400,000 of stock, a flat 24% ordinary rate (single filers pay it on income over $105,700 in 2026), and a 15% capital gains rate.

A low basis favors NUA. A high basis pulls most of the tax into a single year and gives up the deferral. A basis that large would also push some income past the $201,775 threshold for the 32% bracket and the $256,225 threshold for the 35% bracket for single filers, which shrinks the advantage further.

Risks to Weigh Before the Shares Move

Keeping a large share of your net worth in one company’s stock ties your retirement to that company’s performance. The basis also creates a one-year income spike. Medicare surcharges, called IRMAA, apply once modified adjusted gross income goes above $109,000 for single filers or $218,000 for joint filers. Social Security sets them using the most recent federal tax return the IRS provides, so the spike shows up in a later year’s premiums. In 2026, the top tier raises the monthly Part B premium from $202.90 to $689.90.

Heirs also miss out on the usual step-up in basis at death for the NUA portion. Under 26 U.S.C. § 1014(c), income in respect of a decedent (taxable income the deceased had earned but not yet been taxed on) doesn’t get that adjustment, and the IRS has classified NUA that way. Finally, you can only use the choice once: once the shares land in an IRA, the NUA option is gone permanently.

Those low-tax years right after leaving work are often the cheapest window to run moves like this, and we laid out the sequencing in a free Roth window guide that applies to NUA planning too. Of course, the big takeaway here is that before anything moves, ask the plan administrator one question: What is the cost basis of the company shares?

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