# Company Stock in a 401(k)? The Tax Break That Can Beat a Plain IRA Rollover
If your 401(k) holds company stock, rolling that balance into a traditional IRA could cost you thousands in unnecessary taxes. A little-known rule called net unrealized appreciation (NUA) lets you defer taxes on company stock gains until you sell.
Here's how it works. When you leave your job or retire, instead of rolling your entire 401(k) into an IRA, you can distribute company stock directly to a taxable brokerage account. You pay ordinary income tax only on the cost basis—what your employer paid for the shares. The unrealized gains stay untaxed until you eventually sell.
The difference matters enormously. Say your 401(k) holds 1,000 shares of your employer stock worth $100,000, but the cost basis is $30,000. Rolling into an IRA triggers taxes on the full $100,000 as income. Using NUA, you pay ordinary income tax on just $30,000 now, then capital gains tax (typically 15% or 20%) on the $70,000 appreciation only when you sell. That's a lower rate and deferred liability.
The catch: you must separate the company stock from other 401(k) assets when distributing. Other retirement savings roll into an IRA as usual. You also need to hold the stock at least one year before selling to qualify for long-term capital gains rates.
NUA works best when your company stock has appreciated significantly and you're in a high tax bracket now but expect to be in a lower one when you eventually sell. Someone retiring at 55 with substantial gains might hold the shares until age 60 or later, landing in a lower bracket.
This strategy requires careful execution. Fidelity, Vangu