This case study examines a real-world strategy executed in 2025–2026 by a senior executive we’ll call “Alex” (names and some figures anonymized). Alex faced a common retirement problem: a large, concentrated position in employer stock inside a 401(k), a modest pension, and the need to maximize after‑tax retirement income while managing long‑term tax risk. His solution combined the Net Unrealized Appreciation (NUA) rule, careful IRA/Roth conversion steps, and Social Security timing to produce more flexible, lower‑tax income in retirement.

Situation: concentrated company stock inside a 401(k)

At separation from the company at age 59, Alex held a $2.4 million 401(k). Roughly $1.6 million of that balance was employer stock; the remaining $800,000 was diversified mutual funds and fixed income. The employer stock had a reported cost basis in the plan of $240,000 — a product of stock grants and ESPP purchases over many years. Alex also had a small defined‑benefit pension that will pay $18,000 a year beginning at 65, and projected Social Security benefits of $30,000 at full retirement age (if claimed at 67) — benefits he could increase by delaying to 70.

Alex’s objectives were clear:

  • Avoid selling the company stock inside the 401(k) and paying large ordinary income taxes
  • Create a diversified, tax‑efficient portfolio for retirement spending
  • Manage income taxes across early retirement, Social Security claiming, and required minimum distributions

Why NUA was attractive

The Net Unrealized Appreciation (NUA) tax provision applies to employer securities distributed from a qualified retirement plan in a lump‑sum distribution after separation from service. In broad terms:

  • The cost basis of the employer securities is taxed as ordinary income in the year of distribution (reflecting how contributions were taxed while in the plan),
  • The appreciation (current market value minus cost basis) — the NUA — is taxed as long‑term capital gain when the shares are later sold, not as ordinary income.

For Alex, the stock’s market value of $1.6 million minus $240,000 basis meant $1.36 million of appreciation. If he rolled the whole 401(k) to an IRA and sold there, the full $1.6 million would be ordinary income when withdrawn (subject to future tax rates). Using NUA could convert most of that potential ordinary income into capital gains on future sales — a substantial tax difference given historical spreads between ordinary and long‑term capital gains rates.

Execution: a three‑part plan

Alex and his advisors implemented a deliberate sequence across 18 months to balance tax timing, cash needs, and compliance with the NUA rules.

1) Lump‑sum distribution of employer securities (NUA transfer)

Once Alex separated from service, he took an eligible lump‑sum distribution of the employer securities portion of his 401(k) — the action that triggers NUA treatment under IRS rules when performed correctly. Under the distribution:

  • The plan reported the cost basis of $240,000 as ordinary income on his tax return for 2025. Because Alex had several years of below‑normal income (he stopped salary income upon leaving), this ordinary‑income recognition landed largely in a relatively low marginal tax bracket.
  • The employer shares were moved into a taxable brokerage account as physical securities or transferred in kind. The $1.36 million of appreciation became NUA and would be taxed at long‑term capital gain rates when sold.

2) Roll the remaining 401(k) balance to an IRA

The $800,000 of non‑company 401(k) assets were rolled to a traditional IRA. That rollover preserved tax‑deferral for the diversified portion while isolating the concentrated stock outside the IRA — a required step to realize the NUA benefit.

3) Targeted Roth IRA conversions over time

With the employer stock now in a taxable account and a traditional IRA holding the non‑employer assets, Alex started a four‑year Roth conversion plan. The goals were:

  • Convert modest slices of the traditional IRA to Roth IRA each year while Alex’s taxable income remained low post‑separation, staying within the 12%–22% brackets.
  • Reduce future required minimum distributions (RMD) pressure by shifting pre‑tax dollars into Roth where future RMDs do not apply (Roth IRAs are not subject to RMDs for owners),
  • Create a tax‑free source of later retirement income to pair with delayed Social Security and pension payments.

By converting roughly $70,000–$100,000 per year from the traditional IRA to a Roth IRA (timed to fit within Alex’s target marginal brackets and accounting for the cost basis ordinary income from the NUA step), Alex minimized the total taxes paid while strategically reducing future RMD exposure.

Selling the NUA shares: timing and tax control

Instead of dumping the $1.6 million of employer stock immediately, Alex sold the shares over a multi‑year plan. Because the NUA portion is taxed as long‑term capital gain when sold, he and his advisor used those sales to “fill” long‑term capital gains brackets in low‑income years and to avoid pushing ordinary income into higher brackets on top of Roth conversion amounts. Selling over several years also matched his liquidity needs and reduced market‑timing risk.

Social Security and pension timing

Alex elected to delay Social Security until 70, boosting his benefit by ~24% relative to claiming at 67. The small pension beginning at 65 provided a floor for Medicare‑eligible years, which let Alex coordinate Roth conversions and capital gains realizations in his 60s without relying on Social Security as the first income source.

Outcomes: taxes, cashflow, and flexibility

Results after two full tax years of implementation:

  • Ordinary income recognized in 2025 for the NUA cost basis: $240,000 — taxed at Alex’s relatively low marginal rate because salary had ceased; overall federal taxes on that portion were materially lower than the alternative of taxable withdrawals from an IRA at ordinary rates.
  • Total Roth conversions completed: $320,000 across four years — moved from traditional IRA to Roth IRA while Alex’s ordinary income base was low, creating a future source of tax‑free withdrawals.
  • NUA shares sold across three calendar years yielded capital‑gain tax at long‑term rates; by spacing sales he avoided higher ordinary income taxation and smoothed taxable income around Roth conversion years.
  • Projected lifetime tax savings: conservative modeling by his advisor estimated a reduction in cumulative lifetime taxes of roughly $200,000–$350,000 compared with a path of rolling everything to an IRA and relying on ordinary withdrawals — with the caveat that actual savings depend on future tax policy and asset performance.
  • Liquidity and flexibility improved: Alex created a diversified mix — taxable brokerage (original employer stock being sold over time), Roth IRA (tax‑free growth), traditional IRA residual, pension, and delayed Social Security.

Lessons for retirement planners

This case offers several concrete takeaways for readers who may face concentrated employer stock inside a retirement plan:

  • NUA can be a powerful tool but is highly situation‑dependent. It is most valuable when the unrealized appreciation is large, when the participant can absorb ordinary income recognition on the cost basis in a low‑income year, and when capital gains treatment on appreciation is materially preferable to ordinary income treatment.
  • Timing matters. Executing an NUA strategy usually requires a lump‑sum distribution after separation from service and coordination with other income items (pension start dates, Social Security claiming, Roth conversions, and Medicare enrollment).
  • Roth conversions remain one of the most flexible tools to manage future required minimum distributions and create tax‑efficient income later in retirement. Combining modest conversions with NUA can magnify tax efficiency across the whole portfolio.
  • Sell NUA shares deliberately. Because NUA converts appreciation into long‑term capital gains, selling in pieces across years allows you to control the capital gains tax bite and match income to tax brackets.
  • Beware of the rules and documentation. NUA eligibility and the benefit depend on correct handling of the lump‑sum, meeting IRS plan distribution rules, and proper tax reporting. Work with a tax advisor and recordkeeper who understand NUA mechanics.

Caveats

NUA is not a universal win. If the employer stock has little appreciation, or if the cost basis is already very low (which could create a large ordinary income recognition), or if the taxpayer expects future ordinary income tax rates to fall below capital gains rates, the math can flip. In addition, changes in tax law or market performance can alter projected savings. This case study reflects one couple’s disciplined, tax‑aware path; it is not a substitute for personal advice.

Bottom line

Alex’s outcome shows how a coordinated strategy — using the NUA provision to convert appreciation into capital gains, rolling the rest into an IRA and executing targeted Roth conversions, and timing Social Security — can materially improve after‑tax retirement income and flexibility. For owners of concentrated employer stock inside a 401(k), NUA deserves early consideration in retirement planning, paired with thoughtful sequencing of Roth conversions and income timing to manage taxes and RMD exposure.