Option 1:

You bought $10,000 of ABC Stock and it has grown to $50,000. You take an ordinary distribution of $50,000 and pay ordinary income tax on $50,000. At traditional tax-brackets, that may be 30% or $15,000 in tax.

Option 2 (Using NUA):

You bought $10,000 of ABC Stock and it has grown to $50,000. You then take the stock distribution in-kind (meaning you transfer it to your brokerage account). In this case, you pay ordinary income on ONLY the $10,000 initial purchase.

Now you have stock sitting in your brokerage account with a gain (in our example, a $40,000 gain). You will only pay capital gains taxes on any of the money you’ve gained above your original $10,000 purchase price WHEN YOU SELL. Given capital gains taxes are typically 15%, you now have delayed paying taxes and pay at a less rate. In this example, 15% on $40,000 is $6,000.

• This also helps to avoid forced RMD taxes for elderly
• You may be able to pass stock to beneficiaries via a step-up in cost basis at death
• If you separate from your company under the age of 59.5, you do not have to pay 10% penalty

Who is eligible:

• You must have a qualifying event to allow a company sponsored plan withdrawal: Separation, disability, or 59.5 years of age.
• You must distribute as part of a lump-sum distribution
• Must have a tax-deferred (Traditional) 401k, not a Roth 401k

Downside:

Rolling company stock into a taxable brokerage account where you otherwise would have rolled to an IRA is a taxable event today.