You've Spent Decades Building Wealth at Costco, Now Comes The Harder Part
A seven-figure 401(k), company stock with a low cost basis, a paycheck that's about to stop—retirement from Costco involves a specific set of decisions that most general advice doesn't address. This page is designed to help you understand the mechanics, the strategies, and the traps that matter most for tenured Costco professionals.
What Makes The Costco 401(k) Different From Most
Many Costco employees arrive at retirement with a 401(k) that has grown well beyond what they expected—often $1M to $3M or more for long-tenured professionals. That's the result of decades of consistent contributions, strong company match, and a stock (COST) that has significantly outperformed the broader market over the past 20 years. But a large 401(k) also means a large future tax liability, and how you handle the transition out of it matters enormously.
How The 401(k) is Structured
The Costco 401(k) plan allows employees to hold Costco stock directly inside the account alongside other investment options. This is the key feature that opens the door to the NUA strategy covered in the next section. Long-tenured employees who participated in company stock purchases over many years may have shares with a cost basis that is a small fraction of today's price—which creates a significant planning opportunity at the time of distribution.
Traditional 401(k) contributions are pre-tax, meaning every dollar sitting in the account—contributions, match, and decades of growth—has never been taxed. When you retire and begin taking distributions, those distributions are taxed as ordinary income at your marginal rate. For a retiree drawing $120,000 per year from a 401(k), the tax reality can be significant. Planning how and when to take distributions, what to convert, and what to roll out as stock is what separates a tax-efficient retirement from a costly one.
The Decisions That Need to Happen Before Your Last Day
The most consequential retirement decisions happen in the months before you leave, not after. Once you've separated from Costco and taken your distribution, several options close permanently. Specifically: the NUA election must be made at the time of the lump-sum distribution, 83(b) elections on unvested stock have their own deadlines, and the window to make in-service conversions may close at separation.
Decisions With Consequences
Whether to elect NUA treatment for company stock, handling deferred compensation distributions, whether to do any in-service Roth conversions available in the plan, and how to time the separation date relative to vesting schedules and tax years.
The Distribution Decision
How to take the lump-sum distribution—which assets roll to an IRA, which company stock gets distributed in-kind for NUA treatment, and how to sequence the transactions within the same calendar year to satisfy plan rules.
The Tax Planning Window
Before Social Security starts and before Required Minimum Distributions begin, there is typically a period of low income. This window is the best opportunity to execute Roth conversions, harvest capital gains at 0%, and restructure the portfolio.
Account Withdrawal Sequencing
The order in which you draw from taxable accounts, traditional IRA/401(k), and Roth accounts determines your tax bracket in each year of retirement. Getting this right over a 20–30 year horizon has a large cumulative impact on total taxes paid.
We work with Costco professionals in the final years before retirement to map out every decision point in sequence—before your last day, at distribution, and through the first years of income. The goal is to arrive at retirement with a plan already in motion, not a set of options to figure out under time pressure.
Tax Strategy Most Costco Employees Don't Know They Qualify For
Net Unrealized Appreciation—NUA—is a provision in the tax code that allows you to distribute company stock from your 401(k) in-kind to a taxable brokerage account, and have only the original cost basis taxed as ordinary income. The growth—the NUA—is then taxed at long-term capital gains rates when you eventually sell, rather than at ordinary income rates as it would be in a normal rollover. For Costco employees who've held company stock inside the plan for many years, this can mean a very large tax savings.
Why This Matters For Costco Specifically
COST has increased roughly 10x in price over the past 15 years. An employee who accumulated Costco shares inside their 401(k) during that period may have a cost basis of $30–$50 per share on stock that trades significantly higher today. The spread between what they paid and what it's worth now—the NUA—represents appreciation that can be shifted from ordinary income tax rates (up to 37%) to long-term capital gains rates (typically 15–20%), often saving tens of thousands of dollars or more on a single transaction.
How The Math Works
To make the comparison concrete, here's a simplified example using a $300,000 block of Costco stock with a cost basis of $60,000—a realistic scenario for someone who accumulated shares over 10–15 years of employment.
In this example, the NUA strategy saves approximately $21,600 in taxes on a single distribution—and the higher the embedded gain, the larger the benefit. For employees with very low cost basis shares relative to today's value, the savings can be substantially larger.
The Rules You Must Follow to Qualify
NUA treatment is not automatic—it requires a specific sequence of steps executed correctly in the same calendar year. Missing any of the requirements eliminates the benefit permanently.
When NUA May Not Be The Right Call
NUA is not always the optimal choice. If the cost basis on your shares is high relative to the current price—meaning the stock hasn't appreciated much—the benefit of the strategy shrinks. If you expect to be in a very low tax bracket in retirement, the difference between ordinary income rates and capital gains rates narrows, and a simple rollover may be cleaner. And if you need to sell the shares immediately upon distribution rather than holding them, you'll trigger capital gains right away rather than spreading them over time.
The decision requires running the actual numbers against your specific cost basis, your expected tax bracket in retirement, and when you realistically plan to sell the shares. It is not a rule-of-thumb decision.
NUA distributions must be coordinated carefully with the plan administrator, your CPA, and the receiving brokerage account. The transaction must happen in the correct sequence and within the same calendar year. Errors are difficult or impossible to reverse after the fact.
We pull the actual cost basis records from the Costco 401(k) plan, model the NUA outcome versus a full IRA rollover against your specific tax situation, and determine whether the strategy makes sense and by how much. If it does, we coordinate the distribution process step by step with the plan and your CPA.
Replacing Your Paycheck—And Making it Last
When your last day at Costco arrives, your paycheck stops. What replaces it—and how—is the central question of retirement planning. For most Costco professionals, there are multiple potential income sources: the 401(k), an IRA, taxable accounts, Social Security, possibly Costco deferred compensation, and eventually Required Minimum Distributions. The question is not just how much you can draw, but from which accounts, in which order, and in what amounts to minimize taxes over a 20–30 year horizon.
Understanding Your Income Sources
Before building an income plan, you need a complete inventory of everything available to you. Costco professionals often have more than they realize—particularly those who participated in the deferred compensation plan or have held non-retirement taxable accounts alongside the 401(k).
401(k) & Traditional IRA
Every dollar withdrawn is taxed as ordinary income in the year of withdrawal. This is where most Costco retirees hold the majority of their assets. Distributions are required beginning at age 73 (RMDs), whether you need the income or not.
Roth IRA & Roth 401(k)
Qualified withdrawals are completely tax-free and not subject to RMDs. The most valuable account type in late retirement—and one Costco retirees have the least of. The early retirement window is the best time to build this balance through conversions.
Your Brokerage & NUA Shares
Subject to capital gains tax (typically lower rates than ordinary income) on the growth portion. If you executed an NUA distribution, your Costco shares sit here. Taxable accounts are often drawn from first because capital gains rates are usually lower than ordinary income rates in early years.
Social Security & Deferred Comp
Social Security is guaranteed income, with up to 85% potentially taxable. Deferred compensation from Costco is typically taxable as ordinary income when received, and the distribution schedule was elected in advance—knowing when those payments land relative to your other income matters.
Withdrawal sequencing — the order matters
The conventional wisdom is to draw from taxable accounts first, then tax-deferred, then Roth last. That's a reasonable default, but it's not always optimal. The right sequencing depends on your specific bracket situation each year, when Social Security starts, when RMDs begin, and whether there's a Roth conversion strategy in play.
The core problem with leaving tax-deferred accounts untouched in early retirement is that they continue to grow—and when RMDs begin at 73, the forced withdrawals can push you into a higher bracket than necessary, potentially making more of your Social Security taxable and increasing Medicare surcharges (IRMAA). Deliberately drawing down the pre-tax account earlier, through a combination of withdrawals and Roth conversions, can smooth the tax picture across decades.
"The paycheck didn't require a strategy. The income it replaced does."
How much can you safely withdraw?
The most commonly cited guideline is a 4% annual withdrawal rate—meaning a $2M portfolio supports roughly $80,000 per year in withdrawals with a reasonable expectation of lasting 30 years. That figure comes from historical research on diversified portfolios and is a useful starting point, not a guarantee.
In practice, the withdrawal rate that's sustainable for your situation depends on your asset allocation, what other income sources you have (Social Security, deferred comp), how early you retire, and whether you're comfortable reducing discretionary spending in a down market.
We build a year-by-year income plan that shows exactly where income comes from in each year of retirement—which accounts are tapped, what the tax impact is, what the portfolio balance looks like over time, and where Roth conversions fit in. The goal is a plan you can actually follow, not a static snapshot that becomes obsolete the moment something changes.
The Most Valuable Tax Planning Window Most Retirees Don't Use
In the years between your last day at Costco and the start of Social Security and Required Minimum Distributions, something unusual happens to your income: it drops significantly. For many retirees, that gap, which can be anywhere from two to ten years, is the lowest income period of their adult life. It is also the best opportunity for tax planning that most people either miss entirely or underuse.
Why This Window Exists
While working, your income was largely fixed: salary plus any 401(k) contributions. In retirement, before Social Security starts and before RMDs kick in at age 73, you have significant control over how much taxable income you generate each year. That control is the foundation of all three strategies below.
Strategy 1—Roth Conversions at Low Rates
A Roth conversion means moving money from a pre-tax account (traditional IRA or 401(k)) to a Roth account, paying tax on the converted amount in the current year, and eliminating future taxes on that balance. The value of the strategy comes from the rate differential: if you can convert $50,000 per year at 12% or 22% during the low-income early retirement years, versus having that money come out as an RMD at 24% or 32% at age 75 when Social Security is also flowing, you permanently reduce the total tax bill on that asset.
The optimal conversion amount each year is the difference between your current taxable income and the top of the next bracket—filling the bracket, but not spilling into the one above. This requires modeling, not guessing. The right amount changes every year based on what other income you have.
Strategy 2—0% Capital Gains on Appreciated Stock
In 2026, a married couple filing jointly pays 0% federal capital gains tax on long-term gains if their taxable income falls below approximately $98,900 (the exact threshold adjusts annually for inflation). For a Costco retiree with limited other income in the early years, this bracket may be partially or fully available—meaning you can sell appreciated stock, including NUA shares, and owe nothing in federal capital gains tax on a meaningful amount of gains.
This strategy works best when there is a genuine low-income period and when you have appreciated taxable assets—such as NUA shares from a Costco distribution, or a taxable brokerage account that has grown over time. It requires planning the sale in the right year, at the right income level, before other income sources push you out of the 0% bracket.
Strategy 3—Harvesting Gains to Reset Cost Basis
In years when you have room in the 0% capital gains bracket, it can make sense to sell appreciated securities, realize the gain at 0%, and immediately repurchase the same securities—effectively resetting the cost basis to the current price. This creates no immediate tax cost but significantly reduces the future tax liability on those assets when they're eventually sold at higher income levels. Unlike tax-loss harvesting, there is no wash-sale rule for gains, so the repurchase can happen immediately.
Once Social Security begins and RMDs start at 73, taxable income rises—often by $40,000 to $80,000 per year or more. At that point, Roth conversions become more expensive and the 0% capital gains bracket may no longer be available. These strategies require execution during the low-income window, not after it ends.
We model the full retirement tax picture across a multi-decade horizon—showing where RMDs land, what Social Security does to taxable income, and how much conversion capacity exists in each year before that window closes. This is coordinated with your CPA so the strategy and the return are aligned year by year.
The Decisions That Complete The Retirement Picture
Income planning, tax strategy, and the 401(k) distribution are the most Costco-specific pieces of retirement planning. But a complete retirement plan also requires decisions on Social Security timing, healthcare coverage—particularly if you retire before 65—and estate planning. For Washington State residents, the estate tax rules add a layer of urgency that many people don't account for until it's costly.
Social Security—Timing is a Permanent Decision
You can begin claiming Social Security as early as 62 or as late as 70. Every year you delay past your full retirement age (67 for most people retiring now), your monthly benefit increases by approximately 8%. Delaying from 67 to 70 increases the benefit by 24%. Delaying from 62 to 70 increases it by roughly 77%. That's a permanent, inflation-adjusted, lifetime income difference.
The math on delay generally favors waiting if you're in good health and have assets to draw from in the interim. The breakeven point—where the cumulative value of waiting exceeds the cumulative value of claiming early—typically falls around age 80–82. For someone who lives to 90, the difference between claiming at 62 versus 70 can exceed $200,000 in lifetime benefits.
For married couples, the strategy is more complex. The higher earner's benefit becomes the survivor benefit—meaning if one spouse dies early, the surviving spouse inherits the higher of the two benefits. Maximizing the higher earner's benefit by delaying often makes sense even if the lower earner claims earlier to provide interim income.
One additional consideration: up to 85% of Social Security benefits are taxable depending on total income. Delaying Social Security while doing Roth conversions in the low-income window not only maximizes the benefit—it keeps it out of the years when conversions are pushing up taxable income.
Healthcare Before Medicare
If you retire before age 65, you lose Costco's employer-sponsored health coverage and must find a replacement until Medicare begins. This is one of the most frequently underestimated costs in early retirement planning. For a couple in their late 50s or early 60s, marketplace health insurance can run $1,500–$2,500 per month in premiums alone, before deductibles and out-of-pocket costs.
The Affordable Care Act marketplace provides subsidies based on income—which is another reason the income you generate in early retirement matters. Staying below certain income thresholds can significantly reduce premiums. COBRA from Costco is available for up to 18 months after separation but is typically expensive and not a long-term solution.
At 65, Medicare begins. Part A (hospital) is typically free if you've worked enough quarters. Part B (medical) carries a monthly premium that is income-dependent—the IRMAA surcharges apply if your income from two years prior exceeded certain thresholds. High Roth conversion years can inadvertently trigger IRMAA two years later, which is another reason the timing of conversions matters.
Estate Planning—Washington State Adds Urgency
Washington State imposes an estate tax on estates over $2.193 million (as of 2026) at rates ranging from 10% to 20%. This is separate from the federal estate tax, which doesn't apply until estates exceed $13.6 million per person. For Costco retirees with a seven-figure 401(k), a home, and other assets, Washington's threshold is reachable—and the tax is owed by the estate, not the beneficiaries, meaning it reduces what gets passed on.
A disclaimer trust—sometimes called a bypass trust—can effectively double the Washington State exemption for married couples from $2.193M to approximately $4.4M by allowing the surviving spouse to disclaim assets into a trust at the first death, keeping them out of the surviving spouse's taxable estate. This requires the trust to be established before death and properly funded, which means it needs to be in place now, not later.
Beyond the estate tax, the basic estate planning documents—a will, a durable power of attorney, a healthcare directive, and updated beneficiary designations—are not optional. Beneficiary designations on retirement accounts and life insurance override whatever a will says, and outdated designations (a former spouse, a deceased parent) create problems that are expensive and sometimes impossible to fix after death.
Documents to Have
Will or living trust, durable power of attorney (financial), healthcare power of attorney, advance directive (living will), and current beneficiary designations on all accounts, retirement plans, and insurance policies. Each plays a role, and a gap in any of them can create problems.
Estate Tax Exposure
If your combined estate (retirement accounts, home, other assets) exceeds $2.193M, Washington estate tax applies. A disclaimer trust can double the effective exemption for married couples. Review this before the first spouse passes—it cannot be structured retroactively.
We model the full retirement tax picture across a multi-decade horizon—showing where RMDs land, what Social Security does to taxable income, and how much conversion capacity exists in each year before that window closes. This is coordinated with your CPA so the strategy and the return are aligned year by year.
