Transitioning from a Career
Transitioning from a Career
David and Laura’s Case Study
How Stock Concentration, 401(k) Decisions, and Tax Strategy Impact Long-Term Financial Outcomes
This case study illustrates a common planning situation faced by many families. The individuals described are hypothetical and do not represent actual clients. Outcomes are illustrative and are not a guarantee of future results.
Executive summary
After a long career at one company, a large share of David and Laura’s net worth sat in a single employer stock position held inside a 401(k).
The position had performed well, and that was the source of the difficulty: the gain that made it valuable was also what made it expensive to unwind, and the concentration risk had grown alongside it year by year.
This case study walks through how the Net Unrealized Appreciation election was evaluated, why it fit this particular situation, and how the diversification was sequenced across tax years rather than executed in one transaction.
The situation
David spent most of his career at one company and accumulated employer stock steadily throughout. By the time retirement came into view, that single position represented a share of net worth large enough that its decline would have changed their plans.
Their instinct was to roll the entire 401(k) into an IRA, which is the default path and often the right one. In this case it would have foreclosed a meaningful opportunity.
Planning opportunity: the NUA strategy
Net Unrealized Appreciation is a provision that applies to employer stock held inside a qualified plan. Rather than rolling the shares into an IRA — where all future distributions are taxed as ordinary income — the shares can be distributed in kind, with ordinary income tax due only on the original cost basis. The appreciation is then taxed at long-term capital gains rates when sold.
For a position with a low cost basis and substantial appreciation, the difference between ordinary income rates and long-term capital gains rates over the remaining life of the asset can be considerable.
Why NUA worked here
A low cost basis relative to market value, a concentrated position they intended to diversify anyway, and a retirement year where the ordinary income hit on basis could be absorbed at a manageable rate.
Diversifying the position
The NUA election solved the tax treatment. It did not solve the concentration.
Once shares were held outside the plan with long-term capital gains treatment, we designed a staged disposition across several tax years — sized each year to bracket capacity, coordinated with charitable giving using appreciated shares, and offset where possible by losses harvested elsewhere in the portfolio.
The diversification continuum
There is a spectrum between selling everything immediately and holding indefinitely. The simple approach — sell a fixed portion each year regardless of price — has the advantage of removing the decision from emotion entirely.
More elaborate structures exist and occasionally earn what they cost to run and to understand. For most families, a disciplined multi-year schedule that actually gets followed does more good than a sophisticated strategy that gets second-guessed.
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