NUA: A Hidden Tax Strategy for Costco Employees With Company Stock

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NUA: A Hidden Tax Strategy for Costco Employees With Company Stock

If you’re a long-time Costco employee with a significant amount of company stock in your 401(k), there’s a lesser-known tax strategy that could save you thousands of dollars in retirement: Net Unrealized Appreciation, or NUA.

This strategy only applies to company stock inside your 401(k), but when used correctly, it can reduce how much you pay in taxes when you retire or leave the company.

 What Is NUA?

NUA is the difference between what you originally paid for your Costco stock (the cost basis) and what it’s worth today (the market value).

When you retire or take a full distribution from your 401(k), you have the option to move the company stock out of the 401(k) into a taxable brokerage account. Instead of paying ordinary income tax on the full value, like you would with other 401(k) investments, you only pay ordinary income tax on the original cost basis of the stock. The growth — the NUA — gets taxed later at long-term capital gains rates, which are usually lower.

Example: How It Works

Let’s say:

  • You bought Costco stock inside your 401(k) over the years
  • Your cost basis is $30,000
  • The stock is now worth $100,000

If you use the NUA strategy:

  • You pay ordinary income tax on the $30,000 when you distribute the shares
  • The $70,000 of growth is taxed at long-term capital gains rates when you eventually sell the shares

This could mean a much lower tax bill compared to paying ordinary income tax on the entire $100,000.

When NUA Makes Sense for Costco Employees

NUA might be a good fit if:

  • You’ve worked at Costco for many years and have built up a lot of company stock in your 401(k)
  • That stock has grown significantly in value

  • You don’t need to sell the shares right away and can hold them for future capital gains treatment

    When It Might Not Be the Best Fit

  • Your Costco stock hasn’t appreciated much

  • You’ll be in a much lower tax bracket in retirement and don’t benefit as much from the capital gains treatment

    Important Rules to Follow

  • To qualify for NUA treatment:
  • The stock must be distributed in-kind (not sold for cash)
  • You must take a lump-sum distribution of your 401(k) after a triggering event like retirement, disability, or turning age 59½

  • The entire 401(k) must be rolled over within the calendar year

    Should You Use NUA for Your Costco Stock?

  • There’s no one-size-fits-all answer. NUA can offer serious tax savings, but only if it fits into your broader retirement and income strategy. If you’re a long-tenured Costco employee with highly appreciated stock, it’s worth running the numbers.
  • A good advisor can help you:
  • Determine the cost basis of your Costco shares
  • Compare the tax outcome of NUA vs. an IRA rollover
  • Decide how and when to sell the stock after distribution

  • Weigh the risks of holding concentrated Costco stock in retirement

    Final Thoughts

  • NUA is one of the most overlooked tax strategies available to Costco employees with company stock in their 401(k). If you’re approaching retirement or planning to leave the company, it’s a strategy worth exploring. The rules are specific, but the savings can be substantial.

    Need help analyzing your 401(k) and stock strategy?
    We’re located just a few minutes from Costco HQ and work regularly with current and former Costco employees. Feel free to reach out if you want a second opinion on how to handle your retirement assets. 

    The rules are changing, but your goals haven’t. If you want a second set of eyes on your plan or want to explore tax-saving moves while the window is open, reach out. We’d be glad to help. You can setup a complimentary call here. 

     

Trey Gevers CFP®
Financial Advisor & Partner
Phone: 425-902-4840
Email:tgevers@geverswealth.com
5825 221st Pl SE
Suite 102
Issaquah, WA 98027
geverswealth.com