Retirees holding concentrated employer stock inside a 401(k) face a tax decision at separation or at age 59 1/2 that the general rollover playbook does not address. The Net Unrealized Appreciation election under IRC Section 402(e)(4) offers long-term capital gains treatment on the stock’s appreciation if specific timing rules are met. A standard rollover into a traditional or self-directed IRA defers tax on everything but converts future appreciation into ordinary income at withdrawal. This guide describes the federal tax mechanics of both paths, the lump-sum distribution rules, the decision factors for concentrated holdings, and how the IRA portion of a mixed strategy can hold IRS-eligible physical precious metals.
Quick Answer
NUA under IRC 402(e)(4) taxes the cost basis of employer stock as ordinary income at distribution and the appreciation as long-term capital gains only at sale. A rollover defers tax on everything but turns future appreciation into ordinary income at withdrawal. NUA tends to favor large appreciation and low basis; a rollover tends to favor small NUA, intent to hold for life, or a desire to consolidate into a self-directed IRA holding IRS-eligible metals under IRC Section 408(m)(3). Consult your tax advisor for your specific situation.
NUA under IRC 402(e)(4): the special tax election for employer stock
Net Unrealized Appreciation is the difference between the fair market value of employer securities at the time of distribution and the plan’s cost basis in those securities. IRC Section 402(e)(4)(B) lets a participant who receives a lump-sum distribution of employer securities exclude the NUA from ordinary income at distribution. The cost basis is taxed as ordinary income that year; the NUA portion is taxed as long-term capital gain only when the shares are later sold (26 U.S. Code Section 402).
The mechanics depend on what stock the plan holds. Only securities of the employer that sponsored the plan qualify, including stock of a parent corporation as defined in IRC Section 402(e)(4)(E). Securities held through a self-directed brokerage window inside the plan, mutual funds holding employer stock, or stock of unrelated companies do not qualify. The employer stock must be physically transferred in kind to a taxable brokerage account in the participant’s name to preserve the NUA election.
The IRS confirmed in Revenue Ruling 75-125 and in subsequent guidance that the NUA election is not optional in the sense of choosing per share. If the participant takes the lump-sum distribution and the employer stock is transferred in kind, NUA treatment applies to the appreciation by default. The participant can elect under IRC Section 402(e)(4)(B) to include the NUA in ordinary income, but the default rule is NUA exclusion. The election is irrevocable once made.
Three further rules matter for participants nearing the decision. First, dividends paid on the stock while it is in the plan are part of plan earnings and are taxed as ordinary income at distribution along with the rest of the basis. Second, additional appreciation after the distribution date is long-term or short-term capital gain depending on the holding period after distribution. Third, the participant must hold the in-kind shares in a taxable account; redepositing them into an IRA forfeits the NUA election permanently.
What qualifies as a lump-sum distribution
IRC Section 402(e)(4)(D) defines a lump-sum distribution as the distribution within one taxable year of the entire balance to the credit of the employee. The balance must come from all qualified plans of the employer of the same type. Plans of the same type are grouped into three categories: pension plans, profit-sharing plans (which include 401(k) plans), and stock bonus plans. Two profit-sharing plans of the same employer count as one for this rule; a profit-sharing plan and a defined benefit pension plan are separate.
The triggering event matters. The lump-sum distribution must follow one of four events listed in IRC Section 402(e)(4)(D)(i): separation from service (for employees who are not self-employed), reaching age 59 1/2, death, or disability under IRC Section 72(m)(7). The triggering event opens a window during which the lump-sum requirement can be satisfied. The window is not the same as the one-year distribution timing. The window opens at the triggering event and stays open until the participant takes a distribution that breaks lump-sum status.
A partial distribution before the lump-sum year disqualifies any later NUA election unless the partial distribution falls into a narrow exception. A small in-service withdrawal, a hardship distribution, or a partial rollover before the lump-sum trigger can destroy the NUA opportunity. The participant who plans an NUA election must coordinate every prior plan transaction with the lump-sum year to preserve eligibility. Consult a licensed advisor before electing rollover terms that affect your tax situation.
Cost basis, ordinary income, and long-term capital gains
NUA mechanics produce three separate tax streams. The cost basis of the employer stock is taxed as ordinary income in the lump-sum year. Federal ordinary income rates for 2025 range from 10 percent to 37 percent under IRC Section 1 (IRS Topic 409). The NUA portion is taxed as long-term capital gain when the shares are later sold, at federal rates of 0 percent, 15 percent, or 20 percent depending on taxable income, plus the 3.8 percent Net Investment Income Tax under IRC Section 1411 for higher earners (26 U.S. Code Section 1411). Any further appreciation after distribution is short-term or long-term capital gain depending on the post-distribution holding period.
The cost basis is set by the plan recordkeeper and reported on Form 1099-R when the lump-sum distribution occurs. Box 2a of the 1099-R reports the ordinary income portion (the basis), and box 6 reports the NUA portion. The participant reports the basis as ordinary income on Form 1040 and tracks the NUA separately for the year of sale. The IRS provides background guidance in Publication 575 (Pension and Annuity Income).
The lower the cost basis as a percentage of fair market value, the more attractive NUA becomes on a per-dollar basis. A participant whose employer stock has a 10 percent basis ratio recognizes 10 percent of the fair market value as ordinary income at distribution and 90 percent as long-term capital gain at sale. A participant whose stock has a 70 percent basis ratio recognizes 70 percent at ordinary rates upfront and only 30 percent at long-term capital gains rates later. The numerical break-even depends on the participant’s marginal ordinary rate, expected long-term capital gain rate, expected holding period before sale, and the cost of paying tax now versus later.
State income tax adds a layer. Nine states do not impose state income tax on personal capital gains: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states tax capital gains as ordinary income, with rates from 2.9 percent to 13.3 percent in 2025. The state treatment of the basis portion (ordinary income at distribution) and the state treatment of the NUA portion (capital gain at sale) can differ for residents who move states between the distribution year and the sale year. The interaction with state retirement income exclusions matters for residents over the state-specific age threshold.
One additional rule applies to the cost basis portion if the participant is under age 59 1/2 and has not separated from service after age 55. The 10 percent additional tax under IRC Section 72(t) applies to the cost basis portion as ordinary income. The NUA portion is not subject to the 10 percent additional tax at distribution because it is treated as long-term capital gain at sale, not as a current distribution. The separation-from-service exception under IRC Section 72(t)(2)(A)(v) for distributions after age 55 from the employer’s plan may also apply.
The gold IRA rollover alternative path
A rollover into a traditional or self-directed IRA defers federal tax on the entire 401(k) balance until distributions are taken from the IRA. The trustee-to-trustee transfer avoids the 20 percent mandatory federal withholding that applies to direct payments to the participant. The receiving IRA can be a standard traditional IRA, or a self-directed IRA structured to hold IRS-eligible physical precious metals under IRC Section 408(m)(3) (26 U.S. Code Section 408).
The participant who chooses the rollover path treats the employer stock the same as any other plan asset. The stock can be liquidated inside the IRA without current tax recognition. The cash can then buy IRS-eligible bullion (gold at 99.5 percent fineness with a statutory carve-out for American Gold Eagles, silver at 99.9 percent fineness, platinum and palladium at 99.95 percent) through a precious metals dealer. The metals are held at an IRS-approved depository in the name of the custodian. The participant does not take physical possession until a qualifying distribution event under IRC Section 408(d).
The rollover path forfeits the NUA election because the employer stock no longer sits in a taxable account. Future appreciation inside the IRA is taxed as ordinary income whenever distributions are taken, at the participant’s marginal rate in that year. Required minimum distributions begin at age 73 for participants born 1951 to 1959 and at age 75 for those born 1960 or later under SECURE Act 2.0 (SECURE 2.0 Public Law 117-328). Roth IRAs are exempt from required minimum distributions during the original owner’s lifetime under IRC Section 408A.
The self-directed IRA structure is the same as for any rollover of a 401(k) balance. The participant opens the account with a qualified custodian, initiates the trustee-to-trustee transfer, and directs the purchase of metals after the rollover settles. The gold value calculator helps reconcile the cash balance available for the metals purchase with the spot price and premium of eligible products. Verification of the physical metals received at a future in-kind distribution is covered in how to verify physical gold.
Decision tree: NUA versus rollover
The NUA versus rollover decision turns on five factors: the cost basis ratio of the employer stock, the participant’s current ordinary income tax bracket, the expected long-term capital gains bracket at sale, the expected holding period before sale, and the participant’s preference for concentration versus diversified retirement assets. The cards below describe the typical case for each path. Neither card is a recommendation. Consult your tax advisor and a licensed advisor before electing.
Low basis ratio, intent to sell within a few years
- Cost basis is a small percentage of fair market value (often cited as below 25 percent)
- Participant expects to sell at least part of the stock within a few years of distribution
- Participant has separated from service or has reached age 59 1/2
- Participant is over age 55 and qualifies for the IRC 72(t)(2)(A)(v) exception
- Participant has cash on hand to pay the ordinary income tax on the basis without selling the stock immediately
- Participant accepts continued concentrated exposure to a single equity
High basis ratio, intent to hold for decades, or consolidation goal
- Cost basis is a high percentage of fair market value (often cited as above 50 percent)
- Participant plans to hold the assets for many years and pass them to heirs
- Participant prefers to remove concentrated equity exposure from the retirement balance
- Participant wants the option to hold IRS-eligible physical metals under IRC 408(m)(3)
- Participant prefers tax deferral over the immediate ordinary income tax on the basis
- Participant intends to convert to a Roth IRA later and accepts the ordinary income tax at conversion
| Factor | NUA election | IRA rollover |
|---|---|---|
| Tax on the basis | Ordinary income in the lump-sum year | Deferred until distribution |
| Tax on the appreciation | Long-term capital gain at sale | Ordinary income at distribution |
| 10 percent additional tax under IRC 72(t) | On the basis if under 59 1/2, unless an exception applies | Avoided by trustee-to-trustee transfer |
| Required minimum distributions | None on the taxable brokerage account holding the stock | Apply at the SECURE 2.0 age for traditional IRAs |
| Step-up in basis at death | Generally none on the NUA portion under IRC 691; full step-up on post-distribution appreciation | None inside the traditional IRA; heirs follow inherited IRA rules |
| Option to hold physical metals | Not in the brokerage account holding the stock | Available through a self-directed IRA under IRC 408(m)(3) |
Two case studies by stock concentration
The case studies below illustrate the rules with hypothetical fact patterns common among participants holding employer stock inside a 401(k). The numbers are illustrative. Tax outcomes depend on filing status, state of residence, other income, and timing. Consult your tax advisor and a licensed advisor before electing.
Case study 1: Low basis ratio, large appreciation
A 62-year-old senior engineer at a large U.S. technology employer separates from service. The 401(k) balance is 1,400,000 dollars. Inside the account, employer stock has a fair market value of 600,000 dollars and a plan cost basis of 60,000 dollars (a 10 percent basis ratio). The remaining 800,000 dollars is in index funds and target-date funds. The participant elects a lump-sum distribution in the separation year. The employer stock is transferred in kind to a taxable brokerage account; the 800,000 dollars in funds is rolled trustee-to-trustee into a self-directed IRA. The IRA portion is invested partly in IRS-eligible bullion under IRC Section 408(m)(3) and partly in cash and fixed income.
Tax outcome in year 1: 60,000 dollars of cost basis is taxed as ordinary income. The 540,000 dollars NUA is not taxed at distribution. The IRA rollover is non-taxable. In year 4, the participant sells the employer stock at 720,000 dollars. The 540,000 dollars NUA is taxed at long-term capital gains rates regardless of the post-distribution holding period. The additional 120,000 dollars of post-distribution appreciation is long-term capital gain because the participant held the shares more than one year after distribution.
Case study 2: High basis ratio, intent to hold for decades
A 58-year-old plant manager at a regional manufacturer separates from service. The 401(k) balance is 620,000 dollars. Inside the account, employer stock has a fair market value of 220,000 dollars and a plan cost basis of 165,000 dollars (a 75 percent basis ratio). The remaining 400,000 dollars is in mutual funds. The participant has limited cash outside the plan to pay tax. The participant elects a full trustee-to-trustee rollover of the entire 620,000 dollar balance to a self-directed IRA holding a mix of cash, fixed income, and IRS-eligible bullion under IRC Section 408(m)(3).
Tax outcome in year 1: zero federal income tax on the rollover because trustee-to-trustee transfers are not taxable events. The 220,000 dollars of employer stock value is liquidated inside the IRA without current tax recognition. The cash proceeds are deployed inside the IRA. The participant accepts that future distributions from the traditional IRA will be ordinary income at the participant’s marginal rate in each distribution year, and that required minimum distributions will begin at the SECURE 2.0 age. The participant gains the option to hold IRS-eligible physical metals through the IRA structure.
Frequently asked questions
What is Net Unrealized Appreciation under IRC 402(e)(4)?
Net Unrealized Appreciation (NUA) is a tax election under IRC Section 402(e)(4) that applies to employer securities held inside a qualified retirement plan. When the participant takes a lump-sum distribution that includes the employer stock in kind, the plan’s cost basis is taxed as ordinary income in the year of distribution. The NUA portion (fair market value at distribution minus cost basis) is taxed at long-term capital gains rates only when the shares are later sold. Consult your tax advisor for your specific situation.
What qualifies as a lump-sum distribution for NUA purposes?
Under IRC Section 402(e)(4)(D), a lump-sum distribution is a distribution within one taxable year of the entire balance to the credit of the employee from all qualified plans of the employer of the same type (pension, profit-sharing, or stock bonus). The distribution must follow a triggering event: separation from service (for non-self-employed individuals), reaching age 59 1/2, death, or disability. Partial distributions, ongoing distributions, or in-service rollovers do not qualify.
Can I do NUA on part of my employer stock and roll the rest?
No. The lump-sum distribution rule under IRC 402(e)(4)(D) requires that the entire balance to the credit of the employee from all qualified plans of the same type be distributed within one taxable year. The employer stock is then taken in kind to a taxable brokerage account, and the other plan assets (cash, mutual funds, other holdings) can be rolled to an IRA in the same lump-sum year. Splitting the employer stock itself between an NUA election and an IRA rollover is not permitted.
How does NUA compare with rolling employer stock into a gold IRA?
NUA keeps the employer stock outside the IRA. The cost basis is taxed as ordinary income immediately, and the appreciation is taxed at long-term capital gains rates only when shares are sold. A rollover keeps everything tax-deferred. Inside a self-directed IRA, the employee can sell the employer stock and use the proceeds to buy IRS-eligible precious metals under IRC Section 408(m)(3). Distributions from the IRA are then taxed as ordinary income whenever taken. Consult your tax advisor for your specific situation.
Does the 10 percent early withdrawal additional tax apply to NUA?
The 10 percent additional tax under IRC Section 72(t) may apply to the cost basis portion of an NUA election if the participant is under age 59 1/2 and no other exception applies. The NUA portion itself is not subject to the 10 percent additional tax at the time of distribution because it is treated as long-term capital gain at sale, not as a current distribution. The separation-from-service exception under Section 72(t)(2)(A)(v) for distributions after age 55 from the employer’s plan may also apply to certain NUA distributions.
Is Roth conversion of the employer stock an option instead of NUA or a traditional rollover?
Yes, but the entire fair market value of the converted stock is taxed as ordinary income in the conversion year under IRC Section 408A. The NUA election is forfeited once the stock moves into a Roth IRA because the special long-term capital gains treatment under IRC Section 402(e)(4) requires that the shares stay outside the IRA. A Roth conversion can make sense for participants who expect significantly higher ordinary income tax rates later, but the immediate tax bill is larger than an NUA election. Consult your tax advisor for your specific situation.
Which metals are eligible for the IRA portion of a rollover?
IRC Section 408(m)(3) defines the eligibility for precious metals held in an IRA. Gold must generally meet 99.5 percent fineness, with a statutory carve-out for American Gold Eagle coins. Silver must meet 99.9 percent fineness, and platinum and palladium 99.95 percent. The metals must be held at an IRS-approved depository in the name of the custodian. The participant does not take personal possession until a qualifying distribution event under IRC Section 408(d).
How do I open a self-directed IRA to receive the non-stock plan assets?
Open the self-directed IRA with a qualified custodian that supports IRS-eligible precious metals. Initiate a trustee-to-trustee transfer from the prior 401(k) for the non-stock balance. The custodian credits the funds, and the participant directs the purchase of eligible bullion through a precious metals dealer. The employer stock taken in kind under the NUA election moves to a taxable brokerage account, not the IRA. The two transactions can occur in the same lump-sum distribution year.
Sources and methodology
This guide is based on the following authoritative sources. Past performance is not a guarantee of future results. Nobody can accurately predict where prices will go in the future.
- IRC Section 402(e)(4), Net Unrealized Appreciation rules for employer securities: law.cornell.edu/uscode/text/26/402
- IRC Section 408, individual retirement accounts including the precious metals exception at 408(m)(3): law.cornell.edu/uscode/text/26/408
- IRC Section 408A, Roth IRA conversion rules: law.cornell.edu/uscode/text/26/408A
- IRC Section 72(t), 10 percent additional tax on early distributions: law.cornell.edu/uscode/text/26/72
- IRC Section 1411, Net Investment Income Tax on capital gains: law.cornell.edu/uscode/text/26/1411
- IRC Section 691, income in respect of a decedent: law.cornell.edu/uscode/text/26/691
- IRS Topic 409, Capital Gains and Losses: irs.gov/taxtopics/tc409
- IRS Publication 575, Pension and Annuity Income (NUA reporting on Form 1099-R): irs.gov/forms-pubs/about-publication-575
- IRS Publication 590-A, Contributions to Individual Retirement Arrangements: irs.gov/publications/p590a
- IRS Publication 590-B, Distributions from Individual Retirement Arrangements: irs.gov/publications/p590b
- IRS Revenue Ruling 75-125, employer securities and NUA election mechanics: irs.gov
- SECURE Act 2.0 (Public Law 117-328), required minimum distribution ages: congress.gov
- SEC Investor.gov, self-directed IRAs and the risk of fraud: investor.gov
- FINRA Investor Alert, self-directed IRAs: finra.org
- BBB profile, Augusta Precious Metals (A+ accredited): bbb.org
The Goldiew Editorial Team summarizes federal tax rules from the Internal Revenue Code and IRS published guidance. The guide does not constitute tax, legal, or investment advice. Goldiew is a research platform and does not provide personal financial advice. Consult your tax advisor for your specific situation. Consult a licensed advisor before electing rollover terms.