What happens to the tax break on company stock if I roll my 401(k) into an IRA?

By Kaz · Published 28 September 2026 · How this site checks figures

Summary

The break stops applying to any shares that go into the IRA. When employer stock comes out of a 401(k) as shares in a lump-sum distribution, the IRS says the net unrealized appreciation "is generally not subject to tax until you sell the securities." Roll the same shares into a traditional IRA and the IRS says "the regular IRA distribution rules will apply to any later distributions," so that growth is taxed as ordinary IRA money when you withdraw it. Shares rolled directly to a Roth IRA lose it a different way: the NUA is taxable in the year of the rollover.

What counts as NUA

Form 1099-R describes it as "any increase in value of such securities while in the trust." For example, if the plan paid $30,000 in total for your company shares and they are valued at $90,000 when they come out, the NUA is $90,000 − $30,000 = $60,000. That figure goes in box 6 of the 1099-R, separate from box 2a, the part of the distribution that is generally taxable. You can also choose to include the NUA in income in the year you receive the shares instead of waiting for a sale.

Three places the shares can go

Where the shares go	What Form 1099-R shows	When the NUA is taxed
Paid out to you as shares in a lump sum	NUA in box 6	When you sell, unless you elect to include it that year
Direct rollover to a traditional IRA	Box 2a is zero and box 6 is left blank	As part of later IRA withdrawals, under the regular IRA rules
Direct rollover to a Roth IRA	NUA included in box 2a	In the year of the rollover

The middle row comes from the 2026 filing instructions: report a direct rollover in box 1 with zero in box 2a, and "You do not have to report capital gain in box 3 or NUA in box 6." The last row is spelled out in the recipient instructions: for a direct rollover to a Roth IRA, "the NUA is included in box 2a."

The lump-sum test is where plans trip people up

Topic 412 defines a lump-sum distribution as the payment "within a single tax year of a plan participant's entire balance" from all of the employer's qualified plans of one kind, such as all profit-sharing plans. It also has to be paid because of death, after age 59 1/2, because you separated from service, or, for a self-employed person, after becoming totally and permanently disabled.

Miss that and box 6 shrinks. If the distribution isn't a lump sum, the recipient instructions say the amount shown is only "the NUA attributable to employee contributions." Growth on shares bought with employer matching money isn't part of it.

The lump sum doesn't have to go to one place. Topic 412 lists "Roll over all or part of the distribution" among the options, with no tax now on the part rolled over. So the company shares can come out as shares while the index funds in the same account go to an IRA, and the 401(k) still empties within the one tax year.

Sources

Written by Kaz, an independent publisher.
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