Rock House Financial Insights

Get our monthly newsletter that brings you news and tips from Rock House Financial.


Help – my Northrop Grumman company stock has a huge capital gain!

Does this sound like you? You’re a dutiful Northrop Grumman employee who has worked hard and dedicated long hours to the company. You’ve worked for the company dutifully for 30 years, over which time period you have been buying their stock in your 401(k) – and now it has large gains. You may be eligible for what is called Net Unrealized Appreciation on your company stock. “What’s that?” you ask. In this blog, we’re going to talk about what to do if your Northrop Grumman company stock has a huge capital gain.

But wait!

Before we get started, you may want to check out our blog on the Northrop Grumman 401k plan. We are financial advisors for Northrop Grumman employees and have specialized knowledge of many of the company benefits.

And now onto the blog!

What is Net Unrealized Appreciation on a stock?

Let’s start with some definitions.

Net Unrealized Appreciated, or NUA, is a type of election you can make to determine how company stock inside of your 401(k) is taxed upon distribution. Normally, any distribution from a pre-tax 401(k) is taxed as ordinary income. However, electing NUA tax treatment on your company stock sends the stock ‘in-kind’ (meaning transfer it “as is” without selling) to a taxable investment account and thus, changes the way it is taxed. Don’t worry – we’ll get more into taxation in a bit.

Yes, we know, try to contain your enthusiasm.

Child jumping

The NUA treatment available is determined by the difference between the cost basis, or the price at which you bought the stock, and its current market value. If you have a considerable sum of money in your company’s stock and you are taking it out as a lump sum, electing NUA tax treatment could result in an overall lower tax bill on the money distributed. However, there are a few moving parts.  

Now that we’ve defined what NUA is, in general, let’s attack the question of how it applies to Northrop Grumman employees.  What do you do if your shares of Northrop Grumman stock in your employer’s plan have appreciated?

Northrop Grumman NUA tax treatment: a summary

This strategy becomes available when an employee has a “triggering event”: separation from service (retirement/job change), death, disability, or reaching age 59½. It is often done when an employee retires and decides to move their 401(k) to an IRA or other qualified plan. Ultimately, the available tax savings depend on how low your cost basis is in Northrop Grumman stock, as well as your taxable income level.

If this tax treatment is elected at time of distribution:

  • You will pay ordinary income tax for the current year equal to your cost basis in employer stock (thus, the lower the cost basis of the Northrop Grumman shares, the lower the ordinary income tax assessed). You will be taxed on the cost basis, regardless of whether you actually sell any stock.
  • The value of your Northrop Grumman stock minus your cost basis is your NUA gain. Long-term capital gains tax (0%, 15%, or 20%, depending on taxable income) will be due on your NUA gain, whenever it is you decide to sell. The key here, is that your NUA gain is “locked in” at time of distribution and it will always be taxed at Long-Term capital gains rates upon selling the stock, regardless of how long you held on to it before and after distributing it from your 401(k).
  • Going forward, any gains on the Northrop Grumman stock (now in a taxable account) will be taxed normally as either Short-Term or Long-Term capital gains, depending on holding period.
  • While the NUA gain is exempt from the Medicare surtax of 3.8% for those whom it applies to, NUA gains are not eligible for a step-up in basis upon death. This aspect is similar to 401(k), pre-tax and Roth IRA accounts.

The following example illustrates how a hypothetical NUA election works for Northrop Grumman company stock.

John is an NG employee of over 20 years. He has saved and built up a 401(k) worth $1.5 MM. Of which, $100,000 is made up of NG stock. The cost basis of his purchased shares is $10k. Upon retiring and transferring his 401(k), he elects NUA treatment on his NG stock.

His NG stock worth $100k is transferred in-kind to a taxable investment account while the other $1.4 MM of all pre-tax money is transferred to an IRA. John will now be issued a 1099R for the current year reflecting ordinary income equal to his cost basis of $10k. The $90k of gain, is ear-marked with Long-Term capital gains to be applied whenever he sells. Eight months later, with his NG stock now worth $120,000, he decides to sell it all.

Assuming he is married and has taxable income of $250,000, he will pay 0% on the $10k in cost basis (because already paid at distribution), 15% in Long-Term Capital gains tax on $90k of gain, and 24% in Short-Term capital gains tax on the $20k of gain captured since the distribution of 401(k) assets.

$10k cost basis * 24% ordinary income rate = $2,400

$90k NUA gain * 15% long-term capital gains rate = $13,500

$20k post distribution gain * 24% short-term capital gains rate = $4,800

Total Tax = $20,700

Now let’s say John hadn’t gone through with the NUA. Assuming $100,000 annual distribution (perhaps a ~$7,500/mo retirement spend with a $10k vacation)

$100k distribution * 24% ordinary income rate = $24,000

Total Tax = $24,000

Tax Savings = $3,300 ($24,000 – $20,700)

And if that’s not a tax math headache, we don’t know what is!

Woman with headache


How do I know if I should elect for NUA treatment or not?

To elect, or not to elect – that is the question!

We find it common for NUA tax treatment to be applied when there is Northrop Grumman employer stock held in your 401(k) with a very low basis and very large capital gain.

Here’s why:

As you can see from the example in the previous section, instead of paying tax at your ordinary income rate on a 401(k) withdrawal, you pay ordinary income tax on the cost basis only. The amount of gain at time of distribution is then classified as long-term capital gain, regardless of holding period, and is taxed at a maximum of 20% when you sell. The NUA tax strategy is likely to be beneficial if your marginal rate is greater than 20%.

What should I do after I take the distribution from my 401(k)?

A key rule to electing NUA tax treatment on a distribution is that it requires a lump sum transfer of the whole plan by the end of the year. This means that by the end of the year, you will need to have all the money moved out to somewhere else (which is why it’s often done by retiring employees).

While all the money must be moved out, there is flexibility on where it gets moved to.

  • Assuming your plan keeps records, you are allowed to cherry-pick specific low-basis shares of company stock for NUA tax treatment – it’s not an all-or-none deal on the number of shares.
  • If NUA is elected on any shares, they must be distributed to a taxable brokerage account, and while the total tax rate on all the funds may be lower, going forward that money has lost its tax-deferred nature. Over time, this can be detrimental. However, if you need liquidity for expenses right now, it can be a more tax-efficient way of achieving it.
  • Other pre-tax money can go to an IRA (or after-tax money can go to a Roth IRA)

Any gain above and beyond the NUA long-term gain locked in at time of distribution is taxed at short or long-term capital gains rates, depending on holding period from the date of the lump sum distribution.

NUA can help provide access to retirement savingsforimmediate liquidity or spending needs, at a potentially lower tax rate than what would normally be your ordinary income rate, However, if you don’t need immediate distributions from your 401(k), or if the cost basis isn’t very low, it may make sense to just roll it over to an IRA with the other pre-tax 401(k) money so it can continue to grow tax-deferred.

If you are charitable, or have a charity as your beneficiary, it may also be more beneficial to skip NUA as the IRA alternative will grow tax-deferred and ultimately go to a tax-exempt charity. If you own Northrop Grumman stock with after-tax funds in your 401(k), the after-tax contributions may reduce the taxable cost basis of any shares owned with pre-tax money, thus lowering the amount of ordinary income to be taxed in the current year.

Before you get too excited, distributing after-tax dollars as NUA must be analyzed carefully against rolling over after-tax contributions to a Roth IRA. While there may be less tax initially, that money would now be outside of the tax-free Roth “bucket”.

Did this help you understand your Northrop Grumman company stock a tiny bit better?

Dealing with NUA can be tricky, which is why having a strategy that best serves your goals is important. We recommend that you talk to a financial advisor and a qualified tax professional to help you decide what’s best for you.

We are familiar with the Northrop Grumman 401(k) plan, the company’s benefits, and how NUA works for shares of Northrop Grumman company stock. If you’d like to discuss your situation with us, please reach out.

Rhett Sorensen CFP® is a financial advisor focused on Federal employees and defense contractors.

Rock House Financial (RH Advisors) throughout this website has provided links to various other websites. While the firm believes this information to be reasonably reliable, current and valuable to its clients, The firm provides these links on a strictly informational basis only and cannot be held liable for the accuracy, time sensitive nature, or viability of any information shown on these sites.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.