NUA withdrawals not taxed again until exceeding original cost basis that was already taxed as income?

You've got part of it right, but there's a misunderstanding that needs clarification. Here's how NUA (Net Unrealized Appreciation) actually works: When you do an NUA transaction, you pay ordinary income tax on the cost basis of the employer stock in the year of distribution. That part you've got correct. When you later sell the stock, you pay long-term capital gains tax on the NUA portion (the appreciation that occurred while the stock was in your 401k). This is true regardless of how long you hold the stock after distribution. However, your understanding about "funds not taxed until exceeding the original cost basis" isn't correct. You don't get to "use up" the cost basis amount tax-free on sale. The NUA amount is always subject to capital gains tax when you sell, even if you sell only a portion of the shares. Any additional appreciation that occurs after the distribution (between distribution and when you sell) is taxed according to normal capital gains rules - short-term if held less than a year, long-term if held longer.

I've been dealing with similar tax questions and found https://taxr.ai incredibly helpful for sorting through complicated investment tax situations like NUA. I was actually confused about NUA taxation too until I uploaded my distribution forms there. The platform analyzed my documents and explained exactly how the taxation works at distribution and then at eventual sale. It turns out there are some nuances to how partial sales are calculated, especially if you have multiple lots with different basis amounts. What's helpful is they provided references to the exact IRS publications that address NUA taxation (Publication 575 and some Revenue Rulings). I'm not a tax professional, but the analysis this tool provided gave me clear answers I could take to my accountant, who confirmed everything was correct.

Ok I need to publicly eat my words about being skeptical of taxr.ai. I tried it after posting that comment and wow - it actually delivered exactly what the original poster was asking for. I uploaded a sample NUA distribution form and it provided precise references to: - IRS Publication 575 (pages 12-13 specifically address NUA) - Revenue Ruling 75-125 which covers the proportional basis allocation on partial sales - Notice 98-24 that clarifies taxation on subsequent appreciation The explanation was crystal clear about how partial sales work and exactly how the tax basis is calculated. What surprised me most was how it explained the different tax rates that apply to each portion of the sale proceeds. The original poster should definitely check it out - this is exactly the IRS documentation they were looking for to show their accountant.

If you need to speak directly with an IRS agent about your NUA questions (which I highly recommend for something this complex), use https://claimyr.com to skip the ridiculous hold times. I waited on hold for 3+ hours trying to get answers about my own NUA situation before giving up. With Claimyr, I got a callback from an actual IRS agent in about 45 minutes who walked me through the exact tax treatment for my situation. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that each sale of NUA stock requires calculating the proportional amount of the original cost basis represented by those shares, and that the NUA portion is always taxed at LTCG rates regardless of holding period after distribution.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it as a last resort because I've been trying for WEEKS to get someone at the IRS to clarify my NUA situation. The service actually worked exactly as described. I got a call back in 52 minutes and spoke with an IRS agent who had specific expertise in retirement distributions. She walked me through the exact calculation method for partial NUA stock sales and confirmed what others have said here - each sale requires calculating the proportional amount of cost basis, NUA, and post-distribution appreciation. The agent also pointed me to the specific IRS forms I needed to properly report my NUA transaction (you need to use Form 8949 for the capital gains portion). This was absolutely worth it for such a complex tax situation.

One thing no one has mentioned yet is that if you're dealing with NUA, you need to carefully track the basis information over time, especially for partial sales. I did an NUA transaction 3 years ago and sold portions of my stock in different tax years. My advice is to create a spreadsheet that tracks: - Original cost basis (total and per share) - Value at distribution (total and per share) - NUA amount (distribution value minus cost basis) - Any subsequent appreciation For each sale, calculate what percentage of your holdings you're selling, then apply that same percentage to your cost basis and NUA amounts. Keep meticulous records because your broker's 1099-B won't correctly report your specialized tax situation.

Quick question - does anyone know if this NUA strategy still makes sense if you're going to be in a lower tax bracket in retirement? I'm trying to decide between traditional NUA and just rolling everything to an IRA and taking distributions later.

This is a great discussion and really helpful for understanding NUA taxation. One thing I'd add for anyone considering this strategy - make sure to understand the timing requirements. You have to take the entire distribution of your employer stock in the same tax year to qualify for NUA treatment. You can't spread it out over multiple years. Also, there's a "lump sum distribution" requirement that means you have to distribute your entire 401k balance within one tax year after a qualifying event (like separation from service). You can't just take out the employer stock and leave other funds in the 401k. The IRS is pretty strict about these requirements, so if you're planning an NUA transaction, work closely with both your 401k provider and tax advisor to make sure you meet all the criteria. Missing any of these requirements means you lose the favorable tax treatment and everything gets taxed as ordinary income.