Microsoft Offers Voluntary Exits to 60,000 Workers. After 37 Years, He Risks Losing a 401(k) Tax Break With One IRA Rollover

Microsoft (NASDAQ:MSFT | MSFT Price Prediction) offered voluntary exits on October 26 to about 60,000 eligible employees. The offer covers select teams in the United States, Canada, India and Britain at vice president level and below. That number counts the workers who qualify for the offer, since departures have yet to be confirmed, and for long-tenured U.S. employees considering the package, the costliest mistake could be hiding in the 401(k) paperwork.

Take Rick, a hypothetical 62-year-old eligible for the offer after 37 years at Microsoft. His 401(k) holds $1.2 million, including $250,000 in company stock acquired years ago. He could leave the money in Microsoft’s plan after departing. But if he rolls the shares into an IRA without checking his options, he could permanently lose a valuable tax break.

How Old Company Shares Earn a Capital Gains Discount

Net unrealized appreciation (NUA) is the gain employer stock accumulated while it was held inside a retirement plan. Under a special federal tax rule, Rick can transfer qualifying Microsoft shares directly into a taxable brokerage account as part of a lump-sum distribution. He pays ordinary income tax on the cost basis, or what the plan originally paid for the shares. The appreciation isn’t taxed until he sells, when it generally qualifies for long-term capital gains treatment.

Microsoft’s benefits guidance confirms that qualifying company shares can be distributed in kind and receive this treatment. The company stopped allowing new stock purchases in its 401(k) in 2016, except through dividend reinvestment. Employees could keep the shares they already owned, making this tax break especially relevant to longtime holders like Rick.

Three Rules That Decide Whether Rick Keeps the Break

• Triggering event: The distribution must follow a qualifying event, such as leaving the employer or reaching age 59½. Rick meets both conditions at 62, and the usual 10% early-withdrawal penalty no longer applies.
• One tax year: Rick generally must distribute his entire balance from Microsoft’s qualified plans of the same type within one tax year. He can roll the other $950,000 directly into an IRA while transferring the Microsoft shares in kind to a taxable brokerage account.
• Once the shares land in an IRA, the special basis treatment is gone for good and every dollar that comes out later is taxed as ordinary income.

Running Rick’s Numbers: $42,400 Versus $55,000

Suppose Rick’s shares have a $70,000 cost basis and $180,000 in unrealized gain. For this illustration, assume he pays 22% on the entire amount subject to ordinary income tax and 15% on the appreciation taxed as long-term capital gains.

Using NUA, he owes $15,400 on the basis when the shares are distributed and $27,000 on the gain when he sells. That’s $42,400 in total federal tax.

If the shares go into a traditional IRA instead, all $250,000 is eventually taxed as ordinary income, for a bill of $55,000. NUA saves him $12,600 before timing and other tax effects. It is one of several quiet IRS rules that can drain a retirement account by six figures if you miss them. We covered the rest in a free report here.

Why His Exit Year Changes the Tax Math

The $70,000 basis becomes taxable in the year Rick takes the distribution, adding to his final salary and any severance. That could push him into a higher tax bracket.

Medicare creates a different consideration. Its income-related premium surcharges generally look back two tax years. If Rick takes the distribution at 62, that income would ordinarily fall outside the calculation for his first Medicare premiums at 65. But the income tax bill still matters, especially in a year when he receives his final paycheck and an exit package.

Selling the shares later creates another tax decision. Capital gains count toward Medicare’s income-related surcharges, known as IRMAA. Under the 2026 rules, married couples filing jointly with income above $218,000 enter the first surcharge tier. Part B rises from $202.90 to $284.10 a month per person, with an additional $14.50 monthly surcharge for Part D.

If Rick sells the shares at 63, the gain could affect his premiums when he turns 65. The thresholds will be different by then, but the two-year lookback remains important. Selling earlier could help him avoid that Medicare cost, although combining the gain with his final salary and severance might increase his income tax bill.

Concentration is the other risk. Microsoft shares trade around $531 and are down about 2% over the past year, after climbing nearly 900% over the past decade. Keeping a quarter-million dollars in one stock in retirement leaves Rick exposed to a single company’s results. The NUA portion always qualifies as long-term gain, so he can sell soon after the distribution and diversify.

Before Signing the Voluntary Exit Rollover Forms

• Ask the plan for the cost basis of your company stock. The higher the basis is relative to market value, the smaller the NUA advantage.
• Confirm you’re eligible for NUA first. Then lay out the sequence: shares go in kind to a brokerage account, the rest goes by direct rollover to an IRA, and everything closes out in one calendar year.
• Plan your share sales around your tax bracket, final paycheck, severance and Medicare’s two-year lookback. Selling before 63 could help Rick avoid higher premiums when he first enrolls in Medicare, but taking the entire gain in his exit year won’t necessarily produce the lowest tax bill.

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