Employer stock concentration and the NUA election.
If you have substantial employer stock inside your 401(k) with a cost basis far below current value, the NUA election can be the most valuable tax provision you've never heard of. Used wrong, it disappears forever.
Net Unrealized Appreciation — NUA — is a specific tax election that lets you take employer stock out of your 401(k) and pay ordinary income tax only on the stock's cost basis at the time of distribution. The appreciation (often the bulk of the value) is then taxed at long-term capital gains rates when you eventually sell the shares. For long-tenured employees of energy, technology, healthcare, or aerospace companies — especially Houston-area employees with decades of employer stock accumulation — the savings can be six or seven figures.
How NUA mechanically works
You take a lump-sum distribution of your entire 401(k) balance in one calendar year. The non-employer-stock portion is rolled to a traditional IRA. The employer stock is distributed in-kind to a regular taxable brokerage account. You pay ordinary income tax on the stock's cost basis (the price your employer or you paid when each share was contributed). The unrealized appreciation rides along into the taxable account untaxed; when you eventually sell, that appreciation is taxed at the lower long-term capital gains rate.
Why it can save so much
Without NUA, every dollar that comes out of the 401(k) is taxed at ordinary income rates (up to 37% federal). With NUA, only the cost basis is taxed at ordinary rates; the appreciation is taxed at 0%, 15%, or 20% depending on your bracket. A long-tenured employee with $40,000 cost basis and $400,000 of current value saves the spread on $360,000. The math is dramatic when the basis is small relative to current value.
The triggering-event requirement
NUA requires a 'qualifying event': separation from service, reaching age 59½, death, or disability. And the distribution must be a 'lump-sum distribution' — the entire account balance moved in one calendar year. Take a partial distribution first (even a small one) and the NUA election is generally lost. Roll over employer stock to an IRA and then change your mind — NUA is gone. These rules are technical and unforgiving.
When NUA makes sense
When the stock's cost basis is a small fraction of its current value (typically less than 30%). When you're in a moderate-to-high tax bracket today but expect to be in a similar or lower bracket when you sell shares. When the position is large enough that the tax savings exceed the diversification cost of holding concentrated stock for at least the short term. When you don't need to sell the stock immediately.
When NUA doesn't make sense
When the cost basis is high relative to current value — you might pay more in ordinary income tax on the basis than you'd save on the appreciation. When the stock represents most of your net worth and the diversification need outweighs the tax savings. When you'd need to sell most of the stock immediately — at which point you've paid ordinary tax on basis AND capital gains on appreciation right away.
Common mistakes
Rolling the entire 401(k) to an IRA without considering NUA first (irreversible). Taking a partial distribution that disqualifies the lump-sum requirement. Forgetting that the employer-stock cost basis is reported to you by the plan administrator on a specific form — get it in writing before you make any moves. Not coordinating with a spouse's plans in a community property state (Texas).
Why I bring this up early in retirement conversations
NUA is a one-shot election. Once you've moved the money the wrong way, there's no fix. Even when NUA isn't the right choice, the analysis should happen before any distribution decisions, not after. Many advisors don't know the rules well; many plan administrators won't proactively flag the opportunity. Ask explicitly: 'is NUA on the table for me?'