Overview

Employer stock held inside a 401(k) often represents both retirement savings and a bet on your employer’s future. When you change jobs, you must choose what to do with those shares — and the right decision depends on taxes, plan rules, your risk tolerance, and your financial goals.

This article explains the options, the tax consequences (including the special Net Unrealized Appreciation or NUA rule), practical decision steps, real-world examples, and an action checklist to help you move forward. For authoritative tax guidance see IRS publications on rollovers and NUA and consult a tax advisor before acting (IRS: “Rollovers of Retirement Plan and IRA Distributions”; IRS: “Net Unrealized Appreciation of Employer Securities”).

Why employer stock in a 401(k) is different

Employer stock inside a retirement plan can create concentration risk — a large portion of your nest egg tied to a single company. Unlike mutual funds, company stock does not automatically provide broad diversification. Tax rules also treat employer securities differently when they leave the plan: you may face ordinary income tax, capital gains tax, early withdrawal penalties, and special NUA treatment if you qualify.

Where the stock sits after a job change shapes both taxes and investment flexibility:

  • Leave in plan (if allowed): No immediate tax, but limited access and ongoing concentration.
  • Roll over (IRA or new 401(k)): Keeps tax deferral, increases investment choices, but may foreclose NUA tax treatment.
  • Cash out: Triggers taxes and possibly a 10% early withdrawal penalty if you’re under 59½.
  • Lump-sum + NUA: Potentially favorable tax treatment if conditions are met.

What are your options and the tax consequences?

1) Leave employer stock in the old 401(k)

  • Pros: No immediate tax hit; plan may offer institutional share classes or favorable trading.
  • Cons: You remain concentrated; access and investment choices may be limited. Not all plans allow former employees to keep accounts.

2) Roll over to an IRA or new employer’s plan

  • Pros: Maintains tax-deferred status and lets you diversify investments; IRAs typically offer wider options.
  • Cons: Rolling employer stock into an IRA generally destroys the opportunity to use NUA tax treatment later. Distributions from an IRA (unless converted to Roth) are taxed as ordinary income when withdrawn.
  • See also: How to Roll Over Retirement Accounts Without Tax Surprises (FinHelp) and 401(k) vs. IRA: Contribution Rules and Rollovers (FinHelp) for rollover mechanics and pitfalls.

3) Cash out (take a distribution)

  • Pros: Immediate liquidity.
  • Cons: If you’re younger than 59½ you generally pay a 10% early distribution penalty plus ordinary income tax on pre-tax amounts. Cashing out reduces retirement savings and often increases that year’s taxable income substantially.

4) Lump-sum distribution and Net Unrealized Appreciation (NUA)

  • What NUA is: If you take a lump-sum distribution of employer securities after separation from service and receive the shares in-kind, the cost basis portion is taxed as ordinary income in the year of the distribution; the appreciation (NUA) is taxed at long-term capital gains rates when you sell the shares. This can produce large tax savings when the stock has appreciated significantly.
  • Important limits: NUA applies only to employer securities distributed in a qualifying lump-sum distribution (generally a one-time distribution of the plan balance in the year you separate from service). Rolling securities into an IRA disqualifies the NUA treatment on those shares.
  • Pros: Potentially large tax savings if NUA is substantial and long-term capital gains rates are lower than your ordinary income rate.
  • Cons: You must recognize ordinary income on the cost basis at distribution; you also may still hold concentrated risk until you sell. State taxes and the 3.8% Net Investment Income Tax (for higher incomes) can affect the math.

Authoritative sources: IRS guidance on NUA and rollovers provides exact rules and definitions — consult those pages before acting.

Example to illustrate NUA vs. rollover

Assume you own employer stock in your 401(k):

  • Cost basis (company stock purchase price inside plan): $100,000
  • Current market value of those shares at distribution: $500,000
  • Net unrealized appreciation (NUA): $400,000

NUA route (lump-sum distribution of employer stock, receive shares in-kind):

  • $100,000 (basis) taxed as ordinary income in year of distribution.
  • $400,000 taxed at long-term capital gains rates when you sell the shares.

Rollover to IRA route:

  • Full $500,000 remains tax-deferred, but when you withdraw from the IRA the entire distribution is taxed as ordinary income.

If your ordinary income tax rate would be 35% and long-term capital gains rate 15% (illustrative), the NUA path could materially reduce taxes on the $400,000 gain. However, specific savings depend on your bracket, state tax, and potential NIIT exposure. Always run numbers with a tax professional.

Key questions to ask before deciding

  • Is the employer stock vested? (Non-vested shares may be forfeited.)
  • Does your plan permit in-kind distributions or leaving funds after termination?
  • Are you eligible for a lump-sum distribution that would qualify for NUA (distribution of entire plan balance in the year of separation)?
  • What is your current and expected future tax bracket?
  • Do you need the money now, or can you keep it invested for retirement?
  • How concentrated is your overall portfolio in employer stock? (A common threshold to reconsider is >20–30% concentration.)

Practical steps to take right away

  1. Request plan documents and distribution options from your plan administrator. Confirm whether in-kind distributions are allowed and whether a lump-sum distribution is possible.
  2. Verify vesting and whether any employer match or restrictions apply.
  3. Get a statement showing cost basis and acquisition dates for employer stock inside the plan. You will need these for NUA calculations.
  4. Model taxes under different scenarios (NUA vs. rollover vs. cash out). Consider federal ordinary income, long-term capital gains, NIIT (3.8%), and state income tax.
  5. Talk with a trusted CPA or tax attorney — especially if the NUA numbers look favorable. NUA rules are specific and irreversible once you roll securities into an IRA.
  6. If you rollover, choose the receiving account carefully (IRA vs. new employer plan) and follow trustee-to-trustee transfer procedures to avoid withholding and immediate taxation.

Common mistakes to avoid

  • Rolling appreciated employer stock into an IRA without checking NUA eligibility — that decision removes the NUA tax option.
  • Ignoring state taxes and the 3.8% NIIT when modeling outcomes.
  • Failing to confirm whether your distribution is truly a qualifying lump-sum distribution for NUA purposes.
  • Keeping excessive employer concentration after a job change because of loyalty or optimism rather than portfolio logic.

Short real-world scenarios

  • A client with highly appreciated employer stock used the NUA rule after a corporate exit and saved tens of thousands in federal tax compared with a rollover. The client accepted ordinary income tax on the basis immediately and sold the stock in stages to realize gains at long-term rates.
  • Another client rolled stock into an IRA because they preferred immediate diversification and didn’t want to hold concentrated risk. The trade-off was paying ordinary rates later but gaining peace of mind and a diversified retirement allocation.

These stories show there’s no one-size-fits-all answer — tax math and personal goals drive the optimal choice.

Resources and further reading

  • IRS — “Rollovers of Retirement Plan and IRA Distributions” (official IRS guidance on rollovers)
  • IRS — “Net Unrealized Appreciation (NUA) of Employer Securities” (rules and examples on how NUA works)
  • Consumer Financial Protection Bureau and FINRA pages on retirement planning for additional investor-protection context

FinHelp internal articles to help next steps:

Final checklist before you act

  • Read your plan’s distribution rules and confirm whether NUA is available.
  • Collect cost-basis and acquisition-date records for employer shares.
  • Run a tax comparison (NUA vs. rollover vs. cash out), including state tax and NIIT.
  • Consult a CPA or tax attorney for complex situations or large balances.
  • If rolling over, use direct trustee-to-trustee transfers to avoid withholding mistakes.

Professional disclaimer: This article is educational and does not constitute personalized tax or investment advice. Rules for rollovers, early withdrawals, and NUA are detailed and subject to change; consult a qualified tax professional and review current IRS guidance before making decisions.

If you’d like help modeling numbers for your specific situation, consider sitting down with a CPA or fee-only financial planner who can run the tax scenarios and help align a plan with your retirement goals.