She’s 64 With $900,000 in Her 401(k) and Wants to Roll It Into an IRA. One Move Could Cost Her a Tax Break on $350,000 in Company-Stock Gains

Consider a hypothetical 64-year-old retiree with $900,000 in her former employer’s traditional 401(k). Of that, $400,000 is company stock the plan originally bought for $50,000. Her plan is the routine one: sign the rollover form, move everything to an IRA and draw it down later. That signature would take $350,000 of growth that could qualify for capital gains rates and leave it taxable as ordinary income.

How Company Stock Can Leave the Plan at Capital Gains Rates

Net unrealized appreciation (NUA) is the growth in employer shares while they were held in the plan. When those shares come out through a qualifying total distribution, IRS Publication 575 explains that the employer stock basis is taxed as ordinary income and appreciation is taxed later at capital gains rates.

In practice, the shares move in kind to a taxable account instead of being sold inside the plan. The NUA stays generally tax free until you sell or exchange the securities, and it counts as long-term gain whenever she sells. Any growth after the distribution follows normal holding-period rules. The other $500,000 in cash and funds can still roll into an IRA tax free.

Running Both Paths on $400,000 of Stock

Assume she’s single and has $110,000 in taxable income before these transactions. Using 2026 tax rates for comparison, she spreads IRA withdrawals over five years to stay in the 24% bracket. With NUA, she pays ordinary income tax on the $50,000 basis upfront, then sells the shares over the following five years, keeping the $350,000 gain in the 15% capital gains bracket.

We’re presuming the shares hold their value, tax brackets stay the same and her sales don’t trigger the additional 3.8% tax on investment income. At 64, neither approach carries an early-withdrawal penalty.

Under these assumptions, the NUA approach saves $31,500. The catch is timing: the $12,000 on the basis comes due in the year of the distribution. Inside an IRA, any further gain in the stock also turns into ordinary income, which broadens the gap (we counted nine IRS rules that quietly drain retirement accounts like this one and detailed them all in a free report here).

Medicare’s Two-Year Lookback Hits Both Paths

Capital gains still count toward the income Medicare uses to calculate higher premiums. Her 2026 income will generally determine whether she pays those surcharges in 2028.

For perspective, under 2026 rules, a single filer with income above $205,000 but below $500,000 pays an extra $446.30 a month for Part B and $83.30 for Part D, or about $6,355 a year. The 2028 thresholds and premiums have yet to be announced.

Selling all the shares in one year could push her into one of Medicare’s highest surcharge tiers. Spreading sales across several years may keep her from jumping into a higher tier, although it doesn’t guarantee she’ll avoid surcharges altogether.

Lump-Sum Rules That Can Wipe Out the Break

To qualify, she generally must empty the plan within a single tax year after an eligible event, such as leaving her employer or reaching age 59½. Other plans of the same type maintained by that employer may count too. Leaving money behind in one of them could cost her the tax break.

1. Splitting across tax years. Taking the shares in December and emptying the rest of the account in January fails the one-year test, and the NUA treatment goes with it.
2. Rolling the shares into the IRA. Once employer stock lands in a traditional IRA, the NUA is gone for those shares. Every dollar that later comes out is taxed as ordinary income, which is how a $64,500 tax bill becomes $96,000.
3. Selling within the plan. If the trustee sells the shares before the distribution and she rolls over cash, there are no employer securities left to qualify.

Two Steps Before Signing Any Rollover Paperwork

First, ask the plan for the actual cost basis of the employer stock, broken out by purchase lot. The NUA figure later appears in box 6 of Form 1099-R. Ask whether the plan lets her distribute only the low-basis lots and roll the high-basis lots to the IRA. High-basis shares save little through NUA, and moving them out means paying ordinary tax up front.

Second, model both paths with her real bracket, a year-by-year sale schedule and the IRMAA tiers side by side. If the NUA approach could save her five figures, she should have a CPA check the distribution rules, tax brackets and potential Medicare surcharges before signing the rollover paperwork. A rollover can’t be reversed, but the paperwork can wait until the numbers are done.

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