Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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Updated July 28, 2026. Quick answer: NUA is the difference between what your plan paid for employer shares and what they are worth at distribution. Taken correctly, that difference is taxed as long-term capital gain on sale instead of ordinary income on withdrawal.
The three components after a distribution
| Component | Treatment | When |
|---|---|---|
| Plan cost basis | Ordinary income | At distribution |
| Net unrealised appreciation | Long-term capital gain | When you sell |
| Growth after distribution | Capital gain, short or long by your own holding | When you sell |
The conditions
- The distribution must be a qualifying lump-sum distribution — the entire balance of all like plans, within a single tax year, following a triggering event such as separation from service, reaching 59½, death or disability (IRC §402(e)(4)(D)).
- The employer securities must come out in kind, not sold inside the plan and distributed as cash.
Rolling any part of the balance to an IRA first is the classic way this gets destroyed. Once the shares are in an IRA the NUA character is gone permanently and every dollar is ordinary income on withdrawal.
Why it is rarely offered to you
The default path at separation is a rollover, and it is what almost every provider will suggest. NUA has to be asked for, sequenced correctly, and executed once.
Sources
IRC §402(e)(4)(B); IRC §402(e)(4)(D); Treas. Reg. §1.402(a)-1(b).
This states what the cited authority says. It is not tax advice.