As more executives approach retirement with substantial employer stock inside qualified retirement plans, Net Unrealized Appreciation (NUA) planning has become one of the most underutilized—but high-impact—tax strategies available. For tax professionals, NUA planning represents a clear opportunity to add measurable value by helping high-net-wealth, retirement-age clients evaluate rollover elections, long-term tax consequences, and achieve broader retirement and estate planning goals.
Handled correctly, NUA can significantly reduce lifetime taxes. Handled incorrectly, it can permanently eliminate the option. Because NUA decisions are irrevocable once executed, proactive tax professionals’ involvement is essential.
What Is Net Unrealized Appreciation (NUA)?
NUA refers to the difference between the cost basis of employer stock held inside a qualified retirement plan and its fair market value at the time of distribution.
When certain requirements are met, a client may pay ordinary income tax only on the cost basis at distribution, while the appreciation is taxed later at long-term capital gains rates when the shares are sold.
If employer stock is instead rolled into an Investment Retirement Account (IRA), all future distributions are taxed as ordinary income, permanently forfeiting NUA treatment.
NUA elections are tax decisions, not investment decisions.
Tax professionals are uniquely positioned to model multi-year tax outcomes, compare marginal ordinary and capital gains rates, coordinate timing with retirement income and required minimum distributions, and document defensible recommendations.
NUA elections can and should be part of your tax planning.
Let’s look at an example of how NUA planning can reduce a client’s tax burden.
A 62-year-old retired executive holds $800,000 of employer stock inside a 401(k) with a cost basis of $200,000. If the stock is rolled into an IRA, future distributions may be taxed at a 37% marginal rate, resulting in approximately $296,000 of federal income tax.
If instead the client elects NUA treatment, ordinary income tax is paid on the $200,000 basis, which is approximately $74,000.
The $600,000 of appreciation is taxed later at long-term capital gains rates, resulting in approximately $142,800 of tax.
Total estimated tax is roughly $216,800, producing an estimated tax savings of nearly $80,000.
Tax professionals can use this checklist to evaluate NUA opportunities.
- Confirm eligibility by verifying that employer stock is held in a qualified plan, a triggering event has occurred, and the client can execute a lump-sum distribution within a single tax year.
- Validate cost basis data carefully, as errors are common and costly.
- Segment employer stock into low-, moderate-, and high-basis shares and model NUA selectively. Compare tax outcomes across scenarios, including effects on Medicare IRMAA, Net Investment Income Tax, and state income taxes.
- Coordinate NUA decisions with Roth conversions, charitable planning, concentration risk management, and estate planning.
Use these rules of thumb to decide which shares to treat as NUA.
A commonly used screening rule is the 50% cost basis test. If a share’s cost basis is at or below roughly half of its current fair market value, NUA treatment often merits consideration.
When the cost basis exceeds approximately 50–60% of the value, the benefit of NUA may diminish or disappear. Exceptions certainly apply to this rule of thumb, but it is a good starting point for the analysis.
In practice, tax professionals often prioritize the lowest-basis shares for NUA treatment while rolling higher-basis shares into an IRA. This approach maximizes conversion of ordinary income into capital gains while managing concentration risk and preserving flexibility.
We take a collaborative approach to NUA planning.
NUA elections are among the most consequential and irreversible tax decisions many clients will face. While tax professionals are best positioned to identify eligibility and model tax outcomes, optimal results are often achieved through early coordination with a comprehensive wealth and estate planning team.
At Baker Wealth Strategies, we collaborate closely with tax professional partners to support clients navigating NUA decisions by aligning tax strategy with broader financial planning considerations.
Our role is to support the tax strategy you have designed with assistance in implementation and long-term planning decisions that fall within our area of expertise.
If you have a client approaching retirement with employer stock inside a qualified plan and would like to evaluate whether NUA treatment merits consideration, we welcome the opportunity to work alongside you as part of a coordinated planning team.
– Jennifer Baker, CPA, CFP®, RICP
Baker Wealth Strategies
