Selling $1.36 million in embedded gains all in one year triggers the 20% federal LTCG rate, 3.8% NIIT, and state taxes, representing a swing of over $400,000 compared to smarter paths.
Spreading sales across four retirement years keeps most gains in the 15% federal bracket, typically saving six figures in taxes versus a single-year liquidation.
The NUA election lets 401(k)-held employer stock’s $1.36 million in appreciation be taxed at long-term capital gains rates instead of ordinary income rates, provided the mechanics are executed correctly.
Are you ahead, or behind on retirement? SmartAsset’s free tool can match you with a financial advisor in minutes to help you answer that today. Each advisor has been carefully vetted, and must act in your best interests. Don’t waste another minute; learn more here.
A 64-year-old software executive walks out of the office on her last day with $1.6 million sitting in a single employer stock. Her cost basis is $240,000, meaning roughly $1.36 million is embedded long-term capital gain waiting to be triggered. She has no W-2 income starting next January, a paid-off house, and a 401(k) she has not touched. The real question is how to unwind the position without handing the IRS, her state, and Medicare a tax bill that could swing by more than $400,000 depending on the path she picks.
XiXinXing / Shutterstock.com
This situation is common in late-career tech, finance, and pharma. Concentrated stock built through grants, options, and an employee stock purchase plan can become the largest line item on the balance sheet. SEC filings show executives at Coca-Cola (NYSE:KO), Seagate Technology (NASDAQ:STX), and Republic Services (NYSE:RSG) unwinding positions through Rule 10b5-1 plans and option exercises. Done poorly, the tax drag can erase a decade of compounding.
The single biggest financial tension is bracket management. Federal long-term capital gains are taxed at 0%, 15%, or 20%, with the top rate hitting once taxable income clears roughly the upper-middle bracket. The Net Investment Income Tax of 3.8% kicks in at $200,000 of modified adjusted gross income for a single filer and $250,000 for a joint filer. Those NIIT thresholds were set by statute in 2013 and have never been indexed for inflation, so almost any large one-year sale crosses them. State tax then stacks on, ranging from 0% in Florida or Texas to north of 10% in California or New York.
For context on the reinvestment side, the 10-year Treasury is yielding about 4.5%, near the upper end of its 12-month range, and the Fed funds upper bound has held at 3.75% since December. Proceeds reinvested today earn a real return, which makes the after-tax dollar that survives liquidation worth defending.
Story Continues
Path A: Sell Everything in One Year
Selling the entire $1.36 million gain in 2026 pushes her into the 20% federal LTCG bracket on most of the gain, adds the 3.8% NIIT on the portion above the threshold, and stacks state tax on top. In a mid-tax state, the combined hit easily lands in the high-20% range on the gain.
Path B: Spread Sales Across Four Retirement Years
With no wage income, her taxable income in 2027 starts near zero. By harvesting roughly a quarter of the position each year for four years, she can keep the bulk of each year’s gain inside the 15% federal LTCG bracket and stay under or just at the NIIT threshold. The 0% bracket can absorb a sliver before Social Security and 401(k) withdrawals begin. For most retirees in this profile, this is the default choice. The arithmetic typically saves six figures versus Path A, and the only real risk is the stock falling materially before she finishes selling.
Are you ahead, or behind on retirement? SmartAsset’s free tool can match you with a financial advisor in minutes to help you answer that today. Each advisor has been carefully vetted, and must act in your best interests. Don’t waste another minute; learn more here.
Path C: The NUA Election If Shares Sit Inside the 401(k)
If any of the $1.6 million is held inside her employer 401(k), Net Unrealized Appreciation is an underused move in the code. She takes a lump-sum distribution of the shares in kind. The $240,000 basis is taxed as ordinary income today. The $1.36 million of appreciation is taxed at long-term capital gains rates only when she sells, even if she sells the next day. Anything she does not sell during her lifetime passes to heirs with a step-up in basis at death. NUA usually wins when the basis is low relative to the position.
Path D: A Charitable Remainder Trust
If she already plans to leave money to charity, contributing the shares to a Charitable Remainder Trust lets the trust sell the stock with no immediate capital gains tax, pay her a lifetime income stream (typically 5% to 7% of the trust value annually), and direct the remainder to charity at death. She also gets a partial income tax deduction in the year of the gift. The tradeoff is irrevocability and lower lifetime cash flow than an outright sale would produce. This path only makes sense if charitable intent already exists.
What to Do First
Two concrete next steps:
Find out where the shares actually live. Brokerage account, ESPP, RSU vesting account, and 401(k) shares are taxed under different rules. NUA is only available for employer stock inside the qualified plan, and the election must happen as part of a lump-sum distribution in a single tax year. Miss the mechanics and the option disappears forever.
Model 2027 through 2030 taxable income before selling a single share in 2026. The window between retirement and the start of Social Security and required minimum distributions (currently age 73) is the lowest-bracket stretch most retirees will ever see. Filling that window with gains taxed at 0% and 15% is where the $400,000 swing comes from.
The common mistake is selling everything in the retirement year itself, when severance, deferred compensation, final RSU vests, and bonus payouts often push ordinary income to a career high. Pairing peak ordinary income with a fully realized concentrated position is how a six-figure tax bill becomes a seven-figure one.
If You’ve Been Thinking About Retirement, Pay Attention (sponsor)
Retirement planning doesn’t have to feel overwhelming. The key is finding expert guidance, and SmartAsset’s simple quiz makes it easier than ever for you to connect with a vetted financial advisor. Here’s how:
Answer a Few Simple Questions.
Get Matched with Vetted Advisors
Choose Your Fit
Why wait? Start building the retirement you’ve always dreamed of. Get started today! (sponsor)
