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Making the Most of Company Stock in Your 401K

Garrett Grigas CFA, CFP |

If you own stock from the company you work for in your 401(k), there is a special tax planning strategy that can save you taxes. When company stock held in a 401(k) has grown substantially since purchase, an NUA strategy can be used to separate out the growth portion of the stock and receive preferential tax treatment for it.

What is an NUA Strategy? 

Company stock held in a 401(k) is split into two parts: the initial investment (Basis) portion and the growth (Capital gain) portion. When withdrawn normally from a 401(k), all assets including both the basis and growth portions of the company stock, are taxed as income. An NUA strategy separates the company stock from other investments in the 401(k) and allows the growth portion to be taxed at a lower tax rate used for capital gains while only the basis is taxed as income. The greater the growth portion of the stock, the greater the potential for savings.

Conversion Process:

  • Decide if an NUA strategy makes sense. Identify the gain and basis amounts of the company stock in your 401(k). See if it makes sense to use an NUA strategy. Smaller basis and larger gain amounts make the NUA strategy more effective
  • Roll your company stock out of the 401(k). When ready to use the NUA strategy, roll the company stock out of the 401(k) and into a taxable brokerage account. Do not roll it into an IRA or you will permanently lose access to using this strategy on the company stock.
  • Pay taxes on the basis. When using the NUA transfer strategy, the basis amount of the stock being rolled over is taxable as income in the year of the rollover. This is important to consider when determining if this strategy makes sense for you.
  • Enjoy the benefits. The big benefit comes when you sell your company’s stock. These company shares will be taxed on the remaining growth portion at capital gains tax rates instead of income rates. This can be a considerable benefit compared to if the shares had been withdrawn normally from the 401(k).

Tax Implications:

This is a powerful strategy for those with company stock in their 401(k). We have successfully used it for employees with Microsoft, Amazon, and Costco stock in their 401(k)s and seen the benefit in their taxes. However, it isn’t a great fit for everyone, and the timing of when to use this strategy is important. Be sure to consult with your tax preparer and advisor before using this strategy and only use it with their guidance.