Net Unrealized Appreciation (NUA): The Tax Strategy for Employer Stock in Your Late Spouse's 401(k)

If your late spouse worked for a publicly traded company and held that company's stock inside their 401(k) or pension plan, you have a one-time tax decision to make — one that most surviving spouses either miss entirely or make incorrectly by defaulting to a rollover.

The strategy is called the net unrealized appreciation (NUA) election. Used correctly, it converts what would otherwise be fully ordinary-income-taxed IRA withdrawals into long-term capital gains. The difference in tax rates can be worth tens of thousands of dollars.

But the window to use it is short, the decision is irreversible, and the math only works in specific circumstances. Here is what you need to understand before you act.

What Net Unrealized Appreciation Means

Net unrealized appreciation is the increase in value of employer stock while it sat inside the 401(k) plan. Specifically:

• Cost basis in the plan — what the plan originally paid for the shares (averaged across all purchases inside the plan).
• Fair market value (FMV) at distribution — what the shares are worth on the day they are distributed out of the plan.
• NUA — FMV minus the plan's cost basis. This is the "built-in gain" inside the plan.

Under IRC §402(e)(4), if you take a qualifying lump-sum distribution of employer securities in kind (i.e., the shares themselves move to a taxable brokerage account, not cash), the NUA portion is not taxed at the time of distribution.¹ It stays deferred until you eventually sell the stock — and when you do sell, that NUA is taxed at long-term capital gains rates, regardless of how long you've held it.

The cost basis portion — what the plan paid for those shares — is taxed as ordinary income in the year of the distribution. But only that smaller amount.

Why Death of the Participant Is the Triggering Event

To use NUA treatment, there must be a "triggering event" — a specific life event that qualifies the distribution as a lump-sum distribution under the tax code. The four qualifying events are: leaving the job (separation from service), reaching age 59½, disability, and death.¹

Your spouse's death is a triggering event. That means you, as the surviving spouse beneficiary of a 401(k) holding employer stock, are potentially eligible to use the NUA strategy — even if your spouse was still employed, even if they were under 59½, and even if they never made the election during their lifetime.

Most surviving spouses are never told this. The default path — a rollover to your own IRA — eliminates the NUA opportunity permanently. Once the stock is rolled into an IRA, future withdrawals are all taxed as ordinary income with no LTCG treatment available.

The Tax Math: A Concrete Example

Suppose your late spouse worked at a large corporation for 25 years and accumulated 5,000 shares of company stock inside their 401(k). The plan's cost basis (what the plan paid over time) is $30,000 — or $6 per share. The stock is now worth $200,000 — $40 per share. The NUA is $170,000.

The NUA advantage grows larger when:

• The plan's cost basis is low relative to the current value (high NUA % of total)
• The distribution happens in the year of death when you can use MFJ brackets for the ordinary-income portion
• Your income as a single filer will push future IRA withdrawals into higher brackets (22%, 24%, or above)
• You can keep the NUA stock long enough to fall in the 15% LTCG bracket, or even the 0% bracket for lower-income years

The Decision You Must Make — and Why It's Irreversible

When you inherit a 401(k) holding employer stock, you have two primary options for that stock:

1. Roll it over to your own IRA (or to an inherited IRA). No tax now, all future withdrawals taxed as ordinary income. Clean, simple, most people's default.
2. Take a lump-sum distribution and elect NUA treatment. Employer shares move to a taxable brokerage account in kind. Pay ordinary income tax on the cost basis now; defer the NUA to a later sale at LTCG rates.

This choice is permanent. Once you roll the employer stock into an IRA, the NUA opportunity is gone forever — there is no later election, no undoing the rollover. Conversely, once you take the lump-sum distribution, you cannot later put those shares back into an IRA.²

What the plan administrator will typically do by default: If you give no instructions and the plan has a process for distributing inherited accounts, many plans will simply liquidate and mail you a check, or roll the cash to an inherited IRA. Cash in an IRA cannot use NUA treatment. You must proactively instruct the plan to distribute the shares in-kind if you want to preserve the option.

Requirements for a Valid NUA Election

The IRS has specific requirements. All of the following must be met:¹

• Employer securities only. NUA applies to stock of the employer who sponsored the plan — not mutual funds, not index funds, not other company stock inside the 401(k). If your spouse held a diversified 401(k) with only a small employer stock allocation, NUA applies only to that portion.
• Distribution in-kind. The stock must leave the plan as shares, not as cash. The plan must be capable of distributing shares in kind to a beneficiary's taxable brokerage account.
• Lump-sum distribution. The entire vested account balance from that employer's plan must be distributed within a single tax year. You can't take the employer stock in kind and roll over the rest to an IRA in the same year and claim NUA treatment — the entire plan must be distributed. (Note: if you have plans from multiple former employers, each plan is evaluated separately.)
• Triggering event. Death of the participant qualifies.
• Beneficiary status. You are the designated beneficiary (typically the case for surviving spouses under ERISA rules).

The Year-of-Death Tax Window

If you take the NUA lump-sum distribution in the same calendar year your spouse died, you can file a final joint return (MFJ) for that year. MFJ brackets are roughly twice the width of single-filer brackets — the 12% bracket runs to $94,300 MFJ versus $47,150 single in 2026.³

The ordinary-income portion of an NUA distribution — the cost basis — can often be absorbed within lower MFJ brackets. In the example above, a $30,000 cost basis taxed at 12% MFJ costs $3,600. The same distribution the following year as a single filer might land in the 22% bracket, costing $6,600 — $3,000 more just from the bracket change.

Executing the NUA distribution in the year of death is often optimal. The constraint is practical: the plan must be able to process the distribution before December 31. Some 401(k) plan administrators are slow, especially with unusual in-kind beneficiary distributions. If you are considering this, contact the plan administrator immediately — do not wait.

What Happens After the Distribution

Once the employer shares are in your taxable brokerage account:

• Your cost basis in the brokerage account is the plan's original cost basis — the $30,000 in the example. This is the amount you already paid ordinary income tax on.
• The NUA ($170,000) is taxed at long-term capital gains rates when you sell, regardless of how long you've held the shares in the taxable account. Even if you sell the day after distribution, the NUA is taxed at LTCG rates — there is no holding period requirement for the NUA component.²
• Post-distribution appreciation — any gain above the FMV on the distribution date — is treated as a new capital gain. Hold for more than 1 year and it's long-term (0/15/20%); sell within 12 months and it's short-term (ordinary income rates).

NUA vs. Rollover: When the Rollover Wins

NUA is not always the right choice. An IRA rollover is better when:

• The plan's cost basis is high. If the plan paid near-market prices for the employer stock (low NUA % relative to FMV), the ordinary income tax you pay upfront may not be worth the LTCG savings on a modest NUA component.
• You need the money in an IRA for other reasons. IRAs have creditor protection under federal law in many circumstances; taxable brokerage accounts generally do not.
• You expect to be in a low tax bracket forever. If your future ordinary income is modest enough that IRA withdrawals will be taxed at 12% or less anyway, the LTCG advantage shrinks.
• The stock concentration is a risk. A NUA election means you now hold a concentrated single-stock position in a taxable account. If the stock declines significantly before you sell, you've paid ordinary income tax on a cost basis for stock that's now worth less. Diversifying via an IRA (by selling within the IRA tax-free and reinvesting) avoids this risk.
• The plan can't distribute shares in-kind. Some plans simply cannot or will not distribute employer stock in-kind to a beneficiary. If the plan will only write a check, NUA treatment is not available.

The Break-Even Calculation

A simplified way to evaluate NUA versus rollover:

1. Calculate the ordinary income tax you'd pay now on the cost basis via NUA (use your joint-year MFJ rate if distributing in year of death).
2. Calculate the ordinary income tax you'd pay later on the same cost-basis amount if withdrawn from an IRA as a single filer.
3. Calculate the LTCG tax on the NUA when you plan to sell (at 0%, 15%, or 20% based on your projected single-filer taxable income).
4. Calculate the ordinary income tax on NUA if it stays in an IRA (100% ordinary income on withdrawal).
5. If (Step 1 + Step 3) < (Step 2 + Step 4) when adjusted for present value, NUA wins.

This calculation also needs to account for the time value of deferral (money inside an IRA grows untaxed until withdrawal), your state's tax treatment of capital gains (some states tax capital gains as ordinary income, eliminating the federal advantage), and your projected income in retirement.

Step-by-Step: How to Execute the NUA Election

1. Confirm employer stock is held in the plan. Contact the plan administrator immediately. Ask: (a) does the plan hold employer stock? (b) what is the plan's cost basis per share? (c) can the plan distribute shares in-kind to a beneficiary's taxable brokerage account? (d) how long does the distribution process take?
2. Open a taxable brokerage account where the shares can be received. This account must be in your name.
3. Decide whether to use NUA treatment. Have a fee-only advisor or CPA run the numbers before you instruct the plan. Once you elect, you cannot undo it.
4. Instruct the plan to distribute shares in-kind. Explicitly request a lump-sum distribution in-kind to your designated taxable brokerage account. Put the instruction in writing. Keep copies.
5. Handle the rest of the plan balance. Any portion of the 401(k) that is not employer stock — mutual funds, cash, other assets — must also be distributed in the same tax year to satisfy the lump-sum requirement. You can roll the non-employer-stock portion to your own IRA (no immediate tax) while taking only the employer shares in-kind. This is the standard approach.
6. Record the FMV and cost basis at distribution. The plan will provide Form 1099-R. Box 6 shows the NUA; Box 2a shows the taxable (cost basis) amount. Keep this documentation permanently — you'll need it when you eventually sell the shares and calculate your capital gain.
7. Pay the ordinary income tax on the cost basis when you file your tax return for the distribution year. This is unavoidable — it's the price of unlocking the NUA advantage.

IRMAA and NUA Interaction

Medicare surcharges (IRMAA) are based on your income two years prior. A large NUA distribution — specifically the taxable cost-basis amount — will appear in your MAGI for the distribution year and flow into your IRMAA calculation two years later. The NUA component itself (deferred until sale) also adds to your MAGI in the year you sell the shares.

Plan the distribution and eventual sale carefully relative to IRMAA thresholds. The single-filer IRMAA tier 1 kicks in at $109,000 of MAGI in 2026 — a roughly $4,600 annual surcharge on top of base Part B premiums.⁴ If you anticipate an NUA distribution year pushing your MAGI above this threshold, consider whether the NUA tax savings outweigh the two-year IRMAA cost. Form SSA-44 can provide relief if you can document a qualifying life change (see the IRMAA appeal guide).

Common Mistakes Surviving Spouses Make

• Automatically rolling everything to an IRA. The bank or plan administrator's default suggestion is almost always "roll it over." This eliminates NUA treatment permanently for employer stock. Ask before you act.
• Taking cash instead of shares. If you instruct the plan to liquidate and send you cash, NUA treatment is gone. The shares must be distributed in-kind.
• Missing the lump-sum requirement. Taking a partial distribution of the employer stock in one year and the rest in another year disqualifies the NUA election. All must come out within the same tax year.
• Ignoring concentrated stock risk. An NUA distribution leaves you with a large single-stock position. Having a plan to diversify (and the tax cost of doing so) is essential before you commit to this strategy.
• Not documenting cost basis. If you lose the Form 1099-R showing the NUA in Box 6, you'll have trouble proving your cost basis when you sell the shares years later. Store it permanently.

Sources

1. IRS — IRC §402(e)(4) and Rev. Proc. 2025-32. Net unrealized appreciation rules under IRC §402(e)(4): employer securities distributed in a lump-sum distribution after a triggering event (separation from service, age 59½, disability, or death) are eligible for NUA treatment. Cost basis taxed as ordinary income in distribution year; NUA deferred until sale and taxed at long-term capital gains rates. Death of participant is a qualifying triggering event for beneficiary distributions.
2. Kitces — Net Unrealized Appreciation IRS Rules and Caveats. Comprehensive analysis: NUA treatment is available to beneficiaries (including surviving spouses) who take a qualifying lump-sum distribution. NUA portion taxed at LTCG rates regardless of post-distribution holding period. Rolling employer stock to IRA permanently eliminates NUA treatment. Post-distribution appreciation above FMV is a separate capital gain subject to holding period rules.
3. Tax Foundation — 2026 Tax Brackets and Federal Income Tax Rates. 2026 ordinary income brackets: MFJ 12% bracket up to $94,300; single 12% bracket up to $47,150. 2026 long-term capital gains thresholds: 0% rate up to $98,900 MFJ / $49,450 single; 20% rate above $613,701 MFJ / $545,501 single.
4. Medicare.gov — 2026 IRMAA Part B Surcharges. 2026 IRMAA Part B: base premium $202.90/mo; tier 1 surcharge begins at $109,000 single MAGI / $218,000 MFJ. Two-year lookback rule: 2026 premiums based on 2024 MAGI.
5. Kiplinger — Heirs Can Use NUA Tax Break for Inherited 401(k)s. Confirms beneficiaries (including surviving spouses) can use NUA treatment. Lump-sum requirement: entire plan balance must be distributed within a single tax year. In-kind distribution requirement: shares must transfer to taxable brokerage, not liquidated to cash.

Tax values verified against IRS Rev. Proc. 2025-32 and Tax Foundation 2026 analysis. NUA rules verified against IRC §402(e)(4) and Kitces analysis. 2026 IRMAA thresholds verified against Medicare.gov. Values current as of May 2026.