How does Net Unrealized Appreciation (NUA) work for 401k invested in employer stock? Bank of America situation

The NUA strategy is real and can be incredibly valuable in your dad's situation! Here's what's happening in plain language: When your dad retires, he can take a lump-sum distribution of his entire 401k. The special NUA tax treatment lets him pay ordinary income tax ONLY on what he originally paid for the Bank of America stock (the cost basis). Then, he only pays the lower long-term capital gains rate on all the growth (the "appreciation") when he eventually sells the shares. This is different from rolling everything to an IRA, where he'd eventually pay ordinary income tax on ALL the money when withdrawn - which could be a much higher tax rate. The "life event" your dad's advisor mentioned refers to triggering events that allow this strategy: retirement, disability, separation from service, or reaching 59½. So retirement definitely qualifies! This strategy works because he invested in employer stock within the 401k. It doesn't matter that he changed his allocation to BOA stock later - what matters is that it's employer stock within the 401k at distribution time.

I went through something similar with my employer stock in a 401k. I highly recommend checking out https://taxr.ai - it really helped me understand the NUA strategy. I uploaded my 401k statements and it identified my cost basis and potential tax savings with different distribution strategies. The NUA rules are super confusing, and my regular tax advisor wasn't very familiar with them. The tool actually showed me that my cost basis was much lower than I thought, making the NUA strategy even more valuable. It also calculated the projected tax difference between rolling to an IRA vs. using the NUA provision.

Just wanted to update after trying taxr.ai from the previous comment. Total game changer for my situation! I uploaded my 401k statements and it broke down exactly what would be taxed at ordinary income rates vs. capital gains rates with the NUA strategy. It showed my cost basis was only $42,000 while my company stock in the 401k is now worth about $180,000. Using NUA would mean paying ordinary income tax on just the $42K and then capital gains on the $138K appreciation when I sell. The tool calculated I'd save approximately $15,000 in taxes compared to a traditional IRA rollover! It also explained that I need to take the ENTIRE 401k distribution in one tax year (doesn't have to be a single transaction though) for the NUA treatment to apply, which confirmed what my advisor said. Super helpful since these rules are so specific.

For anyone dealing with the IRS on NUA issues or trying to get clarification from your 401k administrator, I highly recommend Claimyr (https://claimyr.com). I was stuck in IRS phone tree hell trying to get guidance on my own NUA situation for weeks. Their service got me connected to an actual IRS agent in about 15 minutes when I had been trying for days on my own. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm that the NUA strategy was valid for my situation and explained exactly what forms I needed to file. My 401k administrator was giving me conflicting information, but getting that direct confirmation from the IRS gave me the confidence to proceed with the strategy.

I need to eat some crow here. After my skeptical comment above, I tried Claimyr for an unrelated tax notice issue that had been driving me crazy. Got through to an IRS agent in about 20 minutes after trying for weeks on my own. While they couldn't provide tax strategy advice as I mentioned (that's what CPAs and tax attorneys are for), they were incredibly helpful with the procedural aspects of my situation. For your dad's NUA situation, they could help clarify the forms needed and verify the distribution requirements. I still recommend working with a tax professional who specializes in retirement distributions for the actual strategy, but getting direct IRS clarification on the procedural elements really helped my confidence in the process. Definitely worth the service fee to save hours of frustration.

One important thing nobody's mentioned yet: your dad should consider diversification regardless of the tax strategy. Having an entire retirement portfolio in a single bank stock is extremely risky, especially as he enters retirement. Even if the NUA strategy works out tax-wise, he should consider selling some of that BOA stock after the distribution and diversifying into a more balanced portfolio. The potential tax savings from NUA might be less important than protecting his retirement from single-company risk.

Wait, do you have to take the entire 401k as a lump sum for NUA? I'm confused because my 401k has both company stock and mutual funds. Would I have to cash out everything to get the NUA benefit for just the company stock portion?

I work in retirement planning and see NUA situations regularly. Your father's advisor is correct about the tax advantage, but there are a few critical details to verify before proceeding: 1. **Timing matters**: The NUA distribution must happen in the same calendar year as his retirement. If he retires in May but waits until next year to distribute, he loses the opportunity. 2. **All-or-nothing rule**: As others mentioned, he must distribute his ENTIRE 401k balance. The good news is he can split the distribution - take the BOA stock in-kind to a brokerage account (for NUA treatment) and roll the rest to an IRA if there are other investments. 3. **Cost basis verification**: Make sure BOA's 401k administrator provides accurate cost basis information. I've seen cases where the reported basis was wrong, which can dramatically impact the tax calculation. 4. **Consider the concentration risk**: Having 100% in BOA stock is extremely risky for retirement. Even with the tax advantage, he should have a plan for gradual diversification after the distribution. The NUA strategy can save thousands in taxes, but it requires precise execution. I'd recommend getting a second opinion from a fee-only financial planner who specializes in retirement distributions to make sure all the details are handled correctly.

This is excellent advice from everyone here. I wanted to add one more consideration that's often overlooked with NUA strategies - state taxes. While the federal tax benefits are clear (ordinary income tax on cost basis, capital gains on appreciation), don't forget that your dad's state of residence will also tax the distribution. Some states have no capital gains tax or lower rates than ordinary income, which could add to the NUA benefit. Other states tax capital gains as ordinary income, which might reduce the overall advantage. Also, if your dad is considering relocating in retirement, the timing of the NUA distribution versus a potential move to a more tax-friendly state could be significant. For example, if he's planning to move from a high-tax state like California to a no-tax state like Florida, it might be worth coordinating the distribution timing with the move. I'd definitely echo the recommendation to work with a retirement planning specialist who can model out the complete tax picture - federal, state, and the long-term implications of the concentration risk in BOA stock. The NUA strategy is powerful when executed correctly, but the details really matter.