NUA = Net Unrealized Appreciation (current value - original cost basis of employer stock in 401k).

NUA strategy: take lump-sum distribution, pay ordinary income tax on cost basis ONLY (not total value), then pay capital gains tax (15-20%) on NUA when you sell.

Example: $500k stock, $100k basis.

NUA strategy: $100k ordinary income tax ($24k at 24%) + $400k LTCG ($60k at 15%) = $84k total.

IRA rollover: $500k ordinary income tax = $120k (24%).

Tax savings: $36k (30% less).

Use NUA when: (1) Large appreciation (NUA >50% of stock value), (2) Lower tax bracket now vs retirement (take ordinary income hit at 22-24% vs future 32-37%), (3) Need access before 59½ (NUA has no 10% penalty on appreciation), (4) Estate planning (heirs get step-up basis on NUA portion).

Example: $1M stock, $200k basis, age 55, 24% bracket.

NUA = $800k appreciation taxed at 15% LTCG ($120k) vs IRA rollover = $1M future ordinary income 32% ($320k) = $200k lifetime savings.

Must meet ALL 4 requirements: (1) Triggering event: separation from service (retirement/termination), age 59½, death, or disability (self-employed). (2) Lump-sum distribution: entire 401k balance distributed within one calendar year. (3) Stock must be employer stock (not mutual funds). (4) Stock distributed in-kind (not sold within plan, receive actual shares).

Missing any = lose NUA treatment, all distributions taxed as ordinary income.

Common mistake: taking partial distribution or rolling some funds to IRA first.

NUA = Fair Market Value (at distribution) - Cost Basis (company contributions to buy stock).

Immediate taxes: ordinary income tax on cost basis (10-37% + state).

Upon sale: LTCG tax on NUA (0-20% + 3.8% NIIT) regardless of actual holding period.

Example: Receive $800k stock (FMV), $150k basis.

Year 1: pay ordinary income tax on $150k = $36k (24%).

Year 3: sell for $900k, pay LTCG on $650k NUA = $97.5k (15%) + $24.7k NIIT (3.8%) = $122.2k.

Plus $19k LTCG on $100k post-distribution appreciation.

Total tax: $177.2k vs $216k IRA rollover (24%).

YES, partial NUA strategy often optimal.

Distribute employer stock in-kind (triggers NUA), roll other 401k assets (cash/mutual funds) to IRA.

Example: $1M 401k = $500k employer stock ($100k basis, $400k NUA) + $500k mutual funds.

NUA strategy: distribute $500k stock (pay ordinary income on $100k basis = $24k), roll $500k funds to IRA (no tax).

Sell stock later: $400k NUA taxed at 15% LTCG ($60k).

Total tax: $84k.

Full IRA rollover: $1M future ordinary income = $240k (24%).

Savings: $156k.

Heirs get step-up basis on NUA portion ONLY, not cost basis.

Example: You receive $500k stock ($100k basis, $400k NUA), hold until death, FMV at death $600k.

Heirs' basis: $100k (cost basis) + $600k (step-up on NUA) = $700k.

If sold at $700k: zero capital gains tax (vs $90k tax if you sold pre-death at 15% on $600k appreciation from $100k basis).

Strategy: if terminally ill or elderly, take NUA distribution but don't sell—heirs inherit with stepped-up NUA avoiding all capital gains.