Net Unrealized Appreciation (NUA): The Rollover Strategy Some Costco Employees Miss at Retirement
If you've spent your career at Costco — or any company that offers stock inside your 401(k) — and you're approaching retirement, there's a tax strategy worth understanding before you make any rollover decisions. It's called net unrealized appreciation, or NUA. And in my experience working with a number of former Costco employees who retired with substantial positions in company stock, it's one of the most overlooked opportunities in retirement planning.
Most people, when they think about rolling over a 401(k), assume it all goes into a rollover IRA. That's the default. But if you have company stock with significant appreciation, defaulting to a rollover IRA could cost you — in some cases, a lot.
What Is NUA (Net Unrealized Appreciation)?
Net unrealized appreciation is the difference between what you originally paid for company stock inside your 401(k) — your cost basis — and what that stock is worth today.
When a triggering event occurs — retirement or what we call a separation of service being the most common — you have the option to transfer your company stock out of your 401(k) and into a taxable brokerage account instead of an IRA. That distinction is where the tax benefit lives.
Here's how the math works. Say you have $4 million of Costco stock inside your 401(k), and your cost basis is $500,000. When you roll that stock into a taxable brokerage account, you owe ordinary income taxes on the $500,000 cost basis. But that remaining $3.5 million in appreciation — the NUA — gets taxed at long-term capital gains rates when you eventually sell, not ordinary income rates.
Any other funds in your 401(k) — a target date fund, other holdings — still roll over to a traditional IRA. The company stock is the piece that takes a different path.
The reason this matters: if you rolled all $4 million into an IRA, you would owe ordinary income tax on every dollar you ever withdraw. With NUA, a significant portion of that money will be taxed at capital gains rates instead. For someone in the 32% bracket, the difference between paying 32% and paying 15% on $3.5 million is not a rounding error.
The Four Things People Get Wrong When Performing NUA
If NUA makes sense for your situation, there are four specific things we see people miss — and any one of them can disqualify the strategy or create problems.
- There must be a triggering event. NUA isn't available any time you want it. The most common triggering events are retirement and separation of service. Make sure you understand when and whether you qualify before initiating anything.
- The accounts must be split correctly. Your company stock goes into a taxable brokerage account. Your other pre-tax assets go into a rollover IRA. These are two separate destinations. Getting that wrong defeats the purpose.
- The entire 401(k) must be emptied in one calendar year. This is a lump sum distribution requirement. You can't move part of the 401(k) this year and come back for the rest later. The entire account has to be transferred out of the company plan in the same calendar year. Some people hear that and think, "I can't afford to pay the taxes on the full cost basis all at once." Understood — but that's the rule. The math has to work before you start.
- The transfer must be in-kind. You cannot sell your Costco stock, move the cash, and then repurchase the shares on the other side. The shares have to move in-kind - it’s required.
Is NUA a Good Fit for Your Situation?
NUA is most powerful for individuals who have large appreciation in their company stock. Costco is a good example of this — as are Home Depot, Lowe's, and Microsoft. Employees at publicly traded companies who've held stock for years and watched it grow significantly are the people this strategy is for.
If you're in a high tax bracket and sitting on a large, highly appreciated company stock position, the tax arbitrage is real: the difference between ordinary income rates and capital gains rates on millions of dollars of appreciation is worth running the numbers carefully.
When NUA doesn't make sense:
If the appreciation is low, the strategy loses most of its value. Say you have $1 million of Costco stock but your cost basis is $980,000. The spread isn't there. You can just sell and roll the funds over — NUA isn't adding much.
One more thing worth knowing: once you perform NUA, it's irrevocable. You can't undo it. That's not a reason to avoid the strategy — it's a reason to make sure the math is right before you pull the trigger.
Before You Make Any Rollover Decisions, Check the Math
If you have company stock inside your 401(k), the most important thing you can do before retiring is understand what your cost basis is and what the tax consequences of each path look like. The difference between rolling everything into an IRA and executing a proper NUA strategy can be significant — and once the rollover is done, you can't go back.
If you want someone to run the numbers for you, reach out. We'll confirm your cost basis with your employer-sponsored plan, calculate what taxes would be owed, and walk you through exactly what a potential NUA would look like in your specific situation.
Bryce Edmister is a financial planner at Masonboro Advisors, an independent RIA based in Wilmington, NC. Fairways 2 Finance is his personal brand focused on proactive tax planning and financial education for individuals near and in retirement.
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