The NUA & Roth Conversion Strategy Guide

If you’ve accumulated substantial employer stock in your 401(k) during decades of service at a public company like Procter & Gamble, Kroger, or another Fortune 500 employer, retirement presents a critical tax planning decision. What you do with that company stock can make a difference of hundreds of thousands of dollars over your retirement lifetime.

The Net Unrealized Appreciation (NUA) strategy, when combined with strategic Roth IRA conversions, offers one of the most powerful tax optimization opportunities available to corporate retirees. This guide explains how to maximize this often-overlooked retirement tax strategy.

The Risk of Concentrated Employer Stock in Your 401(k)

Before diving into tax strategies, let’s address the elephant in the room: investment risk.

Holding a large position in any single stock—especially your employer’s—creates what financial advisors call concentration risk. You’re essentially tying both your paycheck and your retirement security to one company’s performance.

History offers painful lessons. Enron employees lost both their jobs and retirement savings when the company collapsed. Lehman Brothers workers faced similar devastation in 2008. Even blue-chip stalwarts like General Electric saw employees’ retirement plans decimated when stock prices plummeted.

Research shows that concentrated stock positions are effectively worth less than 50 cents on the dollar when you account for lack of diversification. That’s sobering.

Yet, corporate stock in your 401(k) offers unique tax advantages through NUA—Net Unrealized Appreciation. Simply rolling everything into an IRA means walking away from potentially massive tax savings.

What is Net Unrealized Appreciation (NUA)?

Net Unrealized Appreciation is the difference between what you originally paid for employer stock in your 401(k)—called the cost basis—and the stock’s current market value. The IRS provides special tax treatment for this appreciation, but only if you follow strict rules.

How the NUA Tax Strategy Works:

• Upon retirement or separation from service, you distribute employer stock ‘in-kind’ (as actual shares) to a taxable brokerage account
• You pay ordinary income tax only on the original cost basis
• The appreciation—often the vast majority of the value—receives long-term capital gains treatment when sold (15% or 20% vs. up to 37% ordinary income rates)
• Your remaining 401(k) assets roll over to a traditional IRA as usual

IRS Requirements for NUA Qualification:

• Lump-sum distribution of your entire 401(k) balance within one tax year
• Stock transferred as shares (in-kind), not sold and converted to cash
• Triggering event must have occurred (retirement after age 59½, separation from service, disability, or death)
• Stock must be from a qualified employer-sponsored plan (401k, profit-sharing, ESOP)

NUA Strategy Case Study: The $2 Million P&G Retirement Decision

Let’s make this concrete with a real-world example.

Meet Sarah, a 62-year-old who just retired from Procter & Gamble after 30 years. Her 401(k) contains:

• $1,000,000 in P&G stock (original cost basis: $250,000, NUA: $750,000)
• $1,000,000 in traditional diversified investment options

To keep things simple, we’ll assume Sarah’s entire 401(k) is pretax—no Roth or after-tax money.

Sarah plans to delay Social Security until age 70 to maximize her benefit. This creates eight years (ages 62-70) of relatively low income—a golden opportunity for tax planning through NUA and Roth conversions.

Traditional Approach: IRA Rollover

If Sarah takes the conventional route and rolls all $2 million into a traditional IRA, here’s what happens:

• All future withdrawals get taxed as ordinary income (32%-37% federal rates)—including any P&G stock gains
• Required Minimum Distributions (RMDs) begin at age 73 on the entire $2M+ balance
• Selling P&G stock to diversify has no immediate tax, but she loses the capital gains opportunity forever
• Higher Medicare IRMAA premiums kick in due to large RMDs

It’s simple, it’s safe, and it’s expensive.

Tax-Optimized Approach: NUA Strategy + Roth Conversions

Now let’s see what happens when Sarah implements a comprehensive tax optimization strategy.

Year 1 (Age 62): Execute NUA Distribution

• Distribute $1M of P&G stock in-kind to a taxable brokerage account
• Pay ordinary income tax on the $250,000 cost basis (~$60,000 at 24% bracket)
• Roll the remaining $1M of 401(k) pretax money to a traditional IRA
• Immediately sell the P&G shares and diversify into a balanced portfolio
• Pay long-term capital gains tax on the $750,000 NUA (~$112,500 at 15%)
• Total Year 1 tax: $172,500

Yes, that upfront tax bill looks steep. But here’s where the strategy really pays off.

The Roth Conversion Opportunity: Years 2-8 (Ages 63-70)

By executing the NUA strategy, Sarah has accomplished two critical things:

First, she reduced her traditional IRA from $2 million down to $1 million.

Second, she created an eight-year window before Social Security begins—perfect for strategic Roth IRA conversions at favorable tax rates.

Strategic Roth Conversion Plan:

Sarah reinvests the proceeds from her P&G stock sale into a tax-efficient, diversified portfolio. For the next several years, she takes withdrawals from this new taxable brokerage account to cover her living expenses.

This keeps her taxable income very low, since she only pays taxes on realized gains in the newly invested funds—not on the entire withdrawal amount.

Each year, Sarah converts a portion of her traditional IRA to a Roth IRA, carefully staying within the 24% federal tax bracket (or lower, depending on her preference). This typically means converting approximately $100,000-$120,000 annually.

Over seven years (ages 63-69), she converts approximately $800,000 to Roth IRA, paying roughly $192,000 in taxes at the favorable 24% bracket. Her remaining traditional IRA balance at age 70 is approximately $260,000 (after accounting for growth).

Long-Term Tax Benefits of the NUA + Roth Conversion Strategy

Now let’s compare Sarah’s two approaches over her retirement lifetime:

	IRA Rollover Only	NUA + Roth Strategy
Initial tax (age 62)	$0	$172,500
Conversion taxes (ages 63-69)	$0	$192,000
Total taxes paid (ages 62-69)	$0	$364,500
Traditional IRA at age 70 (subject to income tax)	~$2.6M	~$260,000
Potential tax on Traditional IRA (24% bracket)	$624,000	$62,400
Roth IRA at age 70 (tax-free)	$0	~$1.1M
Taxable account at age 70 (only gains & dividends taxed)	$0	~$1.1M

The difference is dramatic.

Key Retirement Tax Benefits:

• Reduced lifetime tax liability: Sarah has dramatically reduced her total tax burden over her lifetime, significantly increasing her after-tax net worth
• Tax-free growth forever: The $1.1M Roth IRA will never be taxed—not during Sarah’s lifetime, not during her spouse’s lifetime, and it can pass tax-free to beneficiaries
• No RMDs on Roth: Unlike traditional IRAs, Roth IRAs have no required minimum distributions during the owner’s lifetime, providing complete withdrawal flexibility
• Lower future tax brackets: When Social Security begins at 70, RMDs from only $260,000 (instead of $2.6M) keep Sarah in much lower tax brackets
• Reduced Medicare premiums: Lower taxable income means avoiding IRMAA surcharges on Medicare premiums (potentially $6,000+ annually per person)
• Tax diversification: A three-bucket approach (taxable, traditional IRA, Roth) provides maximum flexibility to manage tax brackets year by year

When the NUA Strategy Makes Sense

The NUA tax strategy works best when you have:

• Significant appreciation: A low cost basis relative to current value. Generally, if your cost basis exceeds 60% of the stock’s value, NUA benefits start to diminish
• Currently in a lower tax bracket: Early retirement before Social Security and RMDs begin is ideal. You want to pay tax on the cost basis when your rates are favorable
• Time for Roth conversions: Gap years between retirement and age 70+ create prime conversion territory
• Need to diversify: NUA lets you move concentrated stock to a taxable account for diversification while locking in favorable capital gains treatment
• Other assets for expenses: You need cash to pay the initial tax bill and fund your lifestyle during the conversion years

When to Avoid the NUA Strategy

Skip the NUA strategy if you:

• Are currently in a high tax bracket and expect lower rates in the future
• Have a high cost basis relative to stock value (minimal NUA to capture)
• Won’t need the money for many years (tax-deferred growth in an IRA may be better)
• Are under age 55 at separation from service (you’ll face a 10% early withdrawal penalty on the cost basis)
• Your employer stock represents only a small portion of your total retirement assets

Critical Implementation Considerations

Verify Your Cost Basis

Before implementing NUA, confirm your cost basis with your plan administrator. This number is foundational—it determines whether the strategy makes financial sense at all.

Some employers match in company stock at current market value (creating a higher basis), while others may have purchased shares at lower historical prices. The details matter.

Diversification is Critical

Yes, NUA provides powerful tax savings. But concentrated stock positions remain inherently risky.

Most financial advisors recommend immediately diversifying your NUA shares after distribution—even if it means paying the capital gains tax right away. The tax savings from NUA still apply, and you eliminate the single-stock concentration risk that’s kept you up at night.

One-Time Irrevocable Decision

NUA is a one-time opportunity. Once you roll employer stock into an IRA, you permanently lose the ability to use the NUA strategy on those shares. There’s no going back.

Analyze this decision carefully before taking any distribution from your 401(k).

Professional Guidance Essential

The interplay between NUA distributions, Roth conversions, Social Security timing, Medicare IRMAA brackets, and state taxes creates genuinely complex optimization problems.

Small differences in timing and amounts can result in six-figure differences in lifetime taxes. This is not a DIY project. Work with a financial advisor and CPA who have real experience with NUA strategies and multi-year tax planning.

Frequently Asked Questions About NUA and Employer Stock

What happens to employer stock in a 401(k) when you retire?

You have several options: roll it into an IRA with your other assets (losing the NUA opportunity forever), use the NUA strategy to transfer shares to a taxable account with favorable tax treatment, or cash out and pay ordinary income taxes on the full value. The best choice depends on your cost basis, tax bracket, and retirement timeline.

How does NUA save money on taxes?

NUA converts what would be ordinary income (taxed at up to 37%) into long-term capital gains (taxed at 15% or 20%). You pay ordinary income tax only on the original cost basis, while all appreciation gets the lower capital gains rate when you eventually sell the stock.

Can I do NUA and Roth conversions in the same year?

Yes, but watch your tax brackets carefully. The NUA distribution (cost basis) counts as ordinary income in the year of distribution. Most advisors recommend executing NUA first, then spreading Roth conversions over multiple years to stay within your target tax brackets and avoid pushing yourself into higher rates unnecessarily.

What companies commonly have employees with NUA opportunities?

NUA opportunities are common at large corporations that match 401(k) contributions with company stock—including Procter & Gamble, ExxonMobil, Chevron, ConocoPhillips, Johnson & Johnson, 3M, and other Fortune 500 companies. Long-tenured employees who have accumulated substantial employer stock holdings over decades are the sweet spot for this strategy.

Conclusion: Maximizing Retirement Tax Efficiency with NUA

If you’ve accumulated substantial employer stock in your 401(k), you’re facing one of retirement’s most important financial decisions.

The default option—rolling everything into an IRA—is simple. It’s safe. And it can cost you hundreds of thousands of dollars in unnecessary lifetime taxes.

The NUA strategy combined with strategic Roth conversions during your gap years can transform your retirement tax situation. Yes, you’ll pay taxes earlier than you might otherwise. But you’ll pay them at lower rates, create a substantial pool of tax-free Roth assets, and maintain far greater control over your tax brackets throughout retirement.

For corporate retirees with highly appreciated stock, retiring before Social Security begins, and willing to be strategic about taxes, the combination of NUA and Roth conversions represents one of the most powerful retirement tax planning strategies available.

The question isn’t whether you can afford to implement this strategy. The question is whether you can afford not to.

Ready to Optimize Your Retirement Tax Strategy?

At Wurz Financial Services, we specialize in helping corporate retirees navigate complex decisions involving employer stock, NUA strategies, and Roth conversions. Our team has extensive experience working with Fortune 500 retirees to optimize lifetime tax efficiency.

Book a call with us today to discuss whether the NUA strategy is right for your situation and to develop a comprehensive multi-year tax optimization plan for your retirement.

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This article is for educational purposes only and should not be considered tax, legal, or investment advice. The NUA strategy involves complex tax rules and should only be implemented after consultation with qualified tax and financial advisors who understand your complete financial situation. Tax laws change, and individual circumstances vary widely. The hypothetical examples presented are for illustrative purposes only and do not represent any specific investment or guarantee of results.

Wurz Financial Services is a registered investment advisor. For more information about our services and how we can help you navigate complex retirement decisions, visit wurzfinancialservices.com or call us to schedule a consultation.