NUA vs. Roth Conversion: Which Is Better for Company Stock in Your 401(k)?

If you've spent a career at one company and your 401(k) holds a large block of appreciated employer stock, you may qualify for one of the most overlooked tax strategies in retirement planning: Net Unrealized Appreciation (NUA) treatment. It lets you pay long-term capital gains rates on decades of stock appreciation instead of ordinary income rates. But it competes directly with the Roth conversion strategy — and the choice between them can mean the difference of $50,000 or more in lifetime taxes.

What NUA is — and how the tax treatment works

Net Unrealized Appreciation is the difference between what your plan paid for employer stock (the cost basis) and the stock's current fair market value at the time you distribute it. When you take a qualifying lump-sum distribution of employer stock, federal tax law gives that appreciation special treatment:¹

• Cost basis: Taxed immediately as ordinary income in the year of distribution — at your marginal rate (12%, 22%, 24%, etc.).
• NUA (the appreciation): Not taxed at distribution. Instead, it is taxed as long-term capital gains when you eventually sell the shares — regardless of how long the stock was actually held inside the plan. The long-term treatment is automatic; it does not require a separate one-year holding period.
• Appreciation after distribution: Any gains that accumulate after you receive the shares are taxed at whatever capital gains rate applies to the actual holding period from distribution date to sale date.

In practical terms: if you have $300,000 of employer stock with a $60,000 cost basis and $240,000 of NUA, you pay ordinary income on $60,000 at distribution, then pay 15% capital gains (for most retirees) on $240,000 when you sell. Compare that to rolling the stock to an IRA and later converting or withdrawing it — you'd pay ordinary income on the full $300,000.

The lump-sum distribution requirement

NUA treatment isn't available on partial distributions. The IRS requires a qualifying lump-sum distribution — defined as distribution of the entire balance from the plan within a single tax year, after a triggering event.² Triggering events are:

• Separation from service (retirement, resignation, termination)
• Reaching age 59½
• Disability (for self-employed plan participants)
• Death

Critically, you do not have to take the entire distribution in cash. You distribute the employer stock in-kind to a taxable brokerage account, and you can roll the remaining plan assets (mutual funds, bonds, etc.) to a traditional IRA. That rollover defers tax on the non-stock portion — preserving your Roth conversion runway on the larger IRA balance.

2026 LTCG and NIIT rates

The NUA advantage depends on the gap between your ordinary income rate and your long-term capital gains rate. In 2026:³

An additional 3.8% Net Investment Income Tax (NIIT) applies to net investment income when MAGI exceeds $200,000 (single) or $250,000 (MFJ). These thresholds are not indexed for inflation — they have been fixed since 2013.⁴

For most retired couples in the golden window with income below $250,000 MAGI: the NUA rate is 15% on the appreciated portion. If your marginal ordinary income rate is 22% or 24%, NUA saves 7–9 percentage points on the appreciation portion of your company stock.

Worked example: Robert, age 64, FERS retiree

Robert retired at 64 from a large defense contractor. His 401(k) holds $1.2 million: $900,000 in diversified funds and $300,000 in company stock. The stock has a cost basis of $60,000 — bought and vested over 30 years. His wife Linda (age 62) has no pension. Their plan is to live on savings for 10 years before Social Security and RMDs begin.

Option A — NUA treatment

• Distribute $300,000 of company stock in-kind to brokerage account
• Roll $900,000 in diversified funds to a traditional IRA
• Tax in year of distribution: $60,000 cost basis at 22% = $13,200
• Stock sold 3 years later at $340,000 (additional $40,000 post-distribution appreciation)
• NUA gains: $240,000 × 15% = $36,000
• Post-distribution appreciation: $40,000 × 15% (held 3 years) = $6,000
• Total NUA strategy tax cost: $55,200 on $300,000 of plan value (18.4% effective rate)
• $900,000 IRA remains available for Roth conversions over 10-year window

Option B — Roll everything to IRA and convert over time

• Roll $1,200,000 to traditional IRA (including company stock, sold inside plan first)
• Convert $120,000/year for 10 years (staying under IRMAA Tier 1 at $218,000 MFJ)
• Tax on $300,000 equivalent at 22%: $66,000
• Future growth on that $300K equivalent: tax-free inside Roth

NUA: when it clearly wins

NUA treatment beats Roth conversion under these conditions — and the advantage compounds when multiple factors align:

• Very low cost basis relative to FMV. If cost basis is 10–20% of fair market value, you pay ordinary income on a small fraction and LTCG on the large fraction. A $50K basis on $500K of stock is a 10% basis ratio — NUA treatment is almost always superior to paying ordinary income on the full $500K.
• You're in a high ordinary income bracket during conversion. If your other income pushes conversions into the 32% or 37% bracket, but your LTCG rate is 15% or 20%, the rate differential is 12–22 percentage points — large enough that NUA wins decisively even before considering time value.
• You plan to hold the stock long-term or pass it to heirs. NUA shares distributed to a taxable account get a step-up in cost basis at death. Your heirs inherit the stock at fair market value at your date of death — the NUA is never taxed at all, not at ordinary income and not at capital gains. The stock essentially passes tax-free. This makes NUA more attractive than Roth for estate-planning when the primary goal is minimizing total family tax across generations.
• You need income before 59½. If you retire at 55 and need to tap the plan before 59½, a lump-sum NUA distribution after age 55 separation from service avoids the 10% early withdrawal penalty (Rule of 55 applies to employer plan distributions, not IRA distributions). A Roth conversion wouldn't help — converting doesn't give you penalty-free access to those funds until the 5-year per-conversion clock expires.
• You don't want RMD complexity. Stock sitting in a taxable brokerage has no RMD requirement. You sell on your timeline. This differs from an IRA balance — where Roth conversion helps but doesn't eliminate planning complexity during the conversion years.

Roth conversion: when it wins

Roth conversion of the equivalent amount beats NUA treatment under these conditions:

• Low NUA ratio (stock hasn't appreciated much). If the stock's cost basis is 60–80% of fair market value, there's little NUA to shelter. You'd pay ordinary income on the cost basis, then only save LTCG rates on a small NUA portion. The upfront tax cost is nearly the same as just converting, but you're left with stock in a taxable account instead of tax-free Roth.
• You're in the golden window with very low bracket room. If you've retired early with little other income, you might convert at 12% or 22%. The rate differential between 22% (conversion) and 15% (NUA LTCG) narrows to just 7 points — not enough to outweigh 10+ years of Roth compounding, especially if the Roth balance will be large and long-lived.
• Your heirs are in high tax brackets. The step-up benefit of NUA shares helps heirs only if they inherit before you sell. If you're spending down the stock during your lifetime, heirs pay LTCG on appreciation after you received the shares. Roth inheritance, by contrast, is fully tax-free for 10 years for any non-spouse beneficiary — a cleaner outcome if your children are in 37% ordinary income brackets.
• State taxes eliminate the NUA advantage. Several states — including California, New York, and New Jersey — do not conform to federal NUA treatment and tax the full distribution as ordinary income. In those states, NUA provides no state tax benefit, narrowing or eliminating the total tax advantage. See the state tax guide for your state's treatment.
• The stock is concentrated risk you want to eliminate. Holding a large block of a single employer's stock in a taxable account is concentrated risk. Many retirees want to diversify. The NUA strategy only works if you hold — or at least don't sell immediately in a way that triggers LTCG in a high-income year. Roth lets you diversify immediately without additional tax consequences (selling inside IRA before conversion is tax-neutral).

The IRMAA complication

One frequently missed interaction: the year you take your lump-sum NUA distribution, the cost basis amount becomes part of your MAGI — and so does any Roth conversion income in the same year. If the combined total pushes your MAGI above the 2026 IRMAA Tier 1 ($218,000 MFJ / $109,000 single), your Medicare Part B and D premiums will spike two years later (in 2028).

In Robert's example above: the $60,000 cost basis distribution is ordinary income. If he also has $100,000 from conversions and $30,000 in Social Security that year, his MAGI easily crosses $218,000 — triggering IRMAA surcharges at age 66. Planning the NUA year carefully — ideally in a year with no Roth conversion and before Medicare enrollment — can avoid this.

A combined strategy: NUA for stock + Roth conversions for the rest

The two strategies are not mutually exclusive. The most common approach for high-NUA situations:

1. Take the lump-sum NUA distribution in a low-income year — ideally the first year of retirement, before Social Security starts.
2. Roll all non-stock 401(k) assets to a traditional IRA in the same year.
3. Begin multi-year Roth conversions from the traditional IRA in subsequent years — carefully managing IRMAA and Social Security torpedo exposure.

This gives you the LTCG benefit on company stock NUA and the Roth compounding benefit on the rest of the IRA. The tax cost of the cost basis in Year 1 is the price of admission — but it's often the lowest-tax year available.

Whether the combined approach beats an all-Roth strategy depends entirely on how the NUA ratio stacks up against your bracket trajectory. For someone with $500,000 of stock at a 10% basis ratio retiring into a 22% bracket with a 10-year golden window: NUA for the stock, Roth conversions for everything else is almost always superior. For someone with $100,000 of stock at a 70% basis ratio and a 12% bracket: convert everything.

Key questions to answer before deciding

1. What is my NUA ratio? (Cost basis ÷ FMV — if below 30%, NUA starts to look attractive)
2. What will my marginal rate be during Roth conversion years?
3. What will my LTCG rate be when I sell the stock? (Check IRMAA and NIIT thresholds)
4. Does my state conform to federal NUA treatment?
5. Do I want to hold the stock or diversify? If diversify, when?
6. Are estate planning goals driving the decision? (Heirs' brackets matter)
7. Will the NUA distribution year trigger IRMAA in two years?

These questions interact in ways that require multi-year tax projection to answer rigorously. A fee-only advisor who models both scenarios across your specific facts — basis, bracket trajectory, IRMAA exposure, state tax, and estate goal — is the right resource for this decision.

1. Fidelity — "Net Unrealized Appreciation (NUA): Make the Most of Company Stock." Overview of NUA mechanics, cost basis treatment, and lump-sum distribution requirements. fidelity.com — NUA overview
2. IRS — Topic No. 412: Lump-Sum Distributions. Qualifying triggering events, lump-sum distribution requirements, and employer securities treatment. irs.gov/taxtopics/tc412
3. IRS Rev. Proc. 2025-32 — 2026 long-term capital gains rate thresholds: 0% up to $49,450 single / $98,900 MFJ; 15% up to $533,400 / $613,700; 20% above those thresholds. IRS Rev. Proc. 2025-32 (PDF)
4. IRS — Net Investment Income Tax. 3.8% NIIT on net investment income above $200,000 single / $250,000 MFJ — thresholds are statutory and not indexed for inflation. irs.gov — NIIT
5. Kitces.com — "Net Unrealized Appreciation IRS Rules: NUA from 401(k) and ESOP Plans." Advanced analysis of NUA eligibility, triggering events, and basis calculation mechanics. kitces.com — NUA rules deep dive

2026 LTCG thresholds from IRS Rev. Proc. 2025-32. NIIT threshold ($200,000/$250,000) is statutory (IRC § 1411) and confirmed unchanged for 2026 per IRS. IRMAA Tier 1 ($109,000 single / $218,000 MFJ) per CMS 2026 Medicare fact sheet. Values current as of June 2026.