[TR-05] Exit Logistics

The paperwork of your last day is four decisions wearing one form — and the default answer is wrong on at least two

Pillar: Approaching Retirement & Transitions · Applies to: Anyone separating from an employer with a retirement plan, employer stock, or deferred compensation Last verified: August 2026 · Refresh cadence: Evergreen (mechanics); figures via FN-02 Related: TR-01 Five-Year Runway · ER-04 Rule of 55 · ER-05 Accessing Money Early · EP-01 Core Document Stack · ST-01 Six State Dimensions · HC-01 ACA Bridge · HC-05 Non-ACA Alternatives · TX-03 Withdrawal Sequencing

Not advice. Nearly everything here is governed by your specific plan document and your specific deferred-compensation agreement, and several of these elections cannot be undone at any price. Get your plan’s actual rules in writing before your last day, because most of these options stop existing the moment you stop being an employee.

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TL;DR

• “Roll your 401(k) to an IRA” is presented as an administrative step and is actually four separate decisions — early access, spousal rights, creditor protection, and employer stock. The default answer is right for fees and wrong for at least two of the others.
• TR-01 sequences these; this page decides them. Where they overlap, TR-01 says when and this page says which.
• Net unrealized appreciation is the single largest number on this page. On $600,000 of employer stock with a $120,000 basis, the NUA election saves $63,360 against rolling it — because it converts $480,000 from ordinary income into long-term gains, a 13.2-point rate spread. §2.
• But NUA is a low-basis strategy, and its cost is real: it forces $38,400 of tax today that a rollover would have deferred for decades. §2 gives the break-even and the partial election almost nobody is offered.
• Deferred compensation was decided years ago and paid out now. Under § 409A, the initial election is irrevocable before the year the money is earned ✅, and changing it later means deferring at least five more years ✅. It is also an unsecured claim on your former employer ✅.

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1. The rollover is four decisions, not one

At the exit interview you will be offered a form with four boxes: leave it, roll to the new employer, roll to an IRA, or cash out. The industry default is “roll to an IRA,” and it is genuinely better on fees and fund selection. It is also the answer to only one of the four questions the form actually asks.

The real question	Leave in plan	Roll to IRA
Early access at 55+	Rule of 55 preserved ✅	Destroyed permanently ✅ (ER-04)
Spousal rights	ERISA makes your spouse the automatic beneficiary absent written consent ✅	No federal equivalent ✅ (EP-01)
Creditor protection	ERISA protection, essentially everywhere	State law — bulletproof to thin ◻️ (ST-01 dim 5)
Employer stock	NUA election still available ✅	NUA destroyed ✅ (§2)
Fees and fund choice	Often worse	Usually better
Consolidation, RMD simplicity	Worse	Better

Three of those four rows are one-way doors and the fourth is not. You can always roll to an IRA later; you can never un-roll. That asymmetry is the whole argument for slowing down: the reversible decision can wait, the irreversible ones cannot.

The move that resolves most of the tension is the partial rollover. Leave in the plan what the Rule of 55 or NUA needs; roll the rest for the fees. Nothing requires the form to be all-or-nothing, and few people are told so.

And direction matters. Rolling an old employer’s plan into your current plan before you separate widens Rule of 55 coverage to the whole balance (ER-04 §5). Plan → plan widens; plan → IRA destroys.

2. Net unrealized appreciation

If you hold employer stock inside the plan, this is likely the largest single tax decision of your exit — and it evaporates the moment the stock moves to an IRA.

The mechanic. On a qualifying lump-sum distribution, employer securities can be distributed in kind to a taxable account. Then ✅:

• the cost basis is ordinary income in the year of distribution, and
• the net unrealized appreciation — market value minus basis — is taxed at long-term capital gains rates when you sell, regardless of how long you hold it.

The conditions are strict ✅: it must be a lump-sum distribution of the entire balance from all plans of that type within a single tax year, following a triggering event — separation from service, reaching 59½, disability, or death. Roll the stock into an IRA and then sell, and the NUA treatment is gone; every dollar is ordinary income forever.

What it is worth

$600,000 of employer stock, $120,000 cost basis, so $480,000 of NUA. Marginal ordinary rate 32%; long-term gains 15% plus the 3.8% NIIT = 18.8% ✅ (FN-02).

	Tax
Path A — roll to an IRA, then withdraw. All ordinary: $600,000 × 32%	$192,000
Path B — NUA election. Basis now: $120,000 × 32% = $38,400 · NUA on sale: $480,000 × 18.8% = $90,240	$128,640
NUA saves	$63,360

The saving is exactly NUA × the rate spread — $480,000 × 13.2 points. That formula is the whole strategy, and it says immediately what makes NUA work or fail.

It is a low-basis strategy

Basis as % of value	NUA	Saving	Ordinary tax due now
10%	$540,000	$71,280	$19,200
20%	$480,000	$63,360	$38,400
30%	$420,000	$55,440	$57,600
50%	$300,000	$39,600	$96,000
70%	$180,000	$23,760	$134,400
90%	$60,000	$7,920	$172,800

The benefit falls and the bill rises together. On high-basis stock you accelerate a large ordinary tax to shelter a small gain — which is why NUA is worth real money on shares bought cheap decades ago and close to worthless on shares acquired recently.

The cost it never advertises

Path B pays $38,400 today that Path A would have deferred inside the IRA, possibly for decades. At 6% growth that prepayment forgoes about $12,988 over five years, $30,369 over ten, $84,754 over twenty.

So the break-even is a horizon question, not just a rate question. The longer you would have deferred, the weaker NUA looks. Three further cautions:

• Under 59½, a 10% penalty applies to the basis portion ◻️ — here $12,000 on top.
• The NUA portion gets no basis step-up at death ◻️. It is income in respect of a decedent, so heirs inherit the embedded gain — unlike ordinary taxable stock (EP-05 §6, TX-01).
• You are now holding a single stock. The tax tail should not wag the concentration dog; a strategy that saves $63,360 and loses 40% to one company’s bad year was not a good trade.

The partial election

You can generally apply NUA to some shares and roll the rest ◻️ — and specifying the lowest-basis lots concentrates the benefit. Applying it to half the position, choosing lots carrying $48,000 of basis: $15,360 of ordinary tax now, $252,000 of NUA sheltered, $33,264 saved — roughly half the full benefit for 40% of the up-front tax, with the remainder still deferring inside the IRA.

Ask whether your plan supports lot-level specification. Many will only do pro-rata ◻️, which materially changes the answer.

3. Deferred compensation

Non-qualified deferred comp is the one item on this list you cannot renegotiate on the way out, because you made the decision years ago and § 409A will not let you revisit it.

The election rules ✅:

• The initial deferral election is irrevocable before the beginning of the year in which the compensation is earned. Performance-based pay over a period of at least twelve months can be elected up to six months before the period ends.
• A subsequent change must be made at least twelve months before the scheduled payment, does not take effect for twelve months, and must push payment out at least five additional years.
• Payment may only be triggered by death, disability, separation from service, a fixed date set at deferral, a change in control, or an unforeseeable emergency ✅.

Two consequences for your exit.

The payout schedule you chose determines your first retirement years’ income, and it is fixed. A lump sum landing in your separation year stacks on top of final salary, PTO payout and bonus — and can push a household clean over the ACA subsidy cliff for that year (HC-01) or into a bracket the whole retirement plan was designed to avoid (TX-03). Installments over five or ten years usually smooth it far better. The time to fix this is the deferral election, years before you leave (TR-01 §4) — which is precisely why TR-01 lists it as a one-way door.

It is an unsecured promise, not an account. Deferred comp remains a general asset of the employer and you are an unsecured creditor until it is paid ✅ — the lesson Enron and Kodak participants learned in bankruptcy court. That argues for taking payment sooner rather than later where the employer’s credit is uncertain, and against letting deferred comp become a large share of net worth in the first place. (Public-company “specified employees” also face a mandatory six-month payment delay after separation ◻️*.)*

4. The health-coverage election

Timing is in TR-01 §5 — the concurrent 60-day windows, COBRA’s retroactivity, and the fact that dropping COBRA voluntarily is not a qualifying event. The comparison itself is HC-01 and HC-05. What belongs here is the exit-specific decision:

• COBRA premiums do not qualify for premium tax credits; marketplace coverage often does. For a retiree with managed MAGI that usually makes the marketplace far cheaper (HC-01).
• COBRA wins in specific cases: mid-year when you have already met a large deductible, when your providers are only in the employer network, or when a plan year is nearly over.
• Neither COBRA nor retiree coverage counts as active-employer coverage for delaying Medicare ✅ (HC-02).
• Check whether your employer subsidises COBRA in a severance package — several months of employer-paid COBRA changes the arithmetic and is negotiable.

5. The rest of the last-day list

• Time the separation date. Vesting cliffs, bonus payout dates, pension accrual, and the tax year all hinge on it, and it is usually the cheapest lever available (TR-01 §4).
• Outstanding 401(k) loan? It typically becomes a deemed distribution — taxable, and penalised if you are under 59½ — unless repaid by the extended filing deadline for that year ◻️. This is the most common surprise on this page.
• Spend the FSA (use-it-or-lose-it); the HSA is yours forever and needs no action (HC-04).
• Roll the beneficiary designations forward, especially after any rollover (EP-01).
• Get the plan’s distribution policy in writing — instalments or lump sum only — which decides whether ER-04 is usable at all.
• Collect documents while you still have access: plan statements, cost-basis records for employer stock, deferred comp agreements, pension estimates, and stock plan grant histories.

Three Scenarios

A. The engineer with 30 years of employer stock. $600,000 of it, $120,000 basis. His advisor’s rollover recommendation would have cost him $63,360 (§2). He elects NUA on the lowest-basis lots only, pays $15,360 of ordinary tax now, rolls the balance, and sells the distributed shares down over three years to manage both concentration and the gains rate. The tax decision and the diversification decision get made together, which is the point.

B. The executive whose deferred comp lands wrong. She elected a lump sum eight years ago, when the retirement plan looked different. It pays in her separation year on top of salary and bonus, pushing MAGI far over the cliff and wasting the ACA-bridge design entirely. Under § 409A she can only re-defer with twelve months’ notice and a five-year push ✅ — neither available now. She adapts instead: front-loads charitable giving into the spike year and abandons Roth conversions until it passes.

C. The 56-year-old who consolidated. He rolled everything to an IRA on his last day for simplicity. He destroyed the Rule of 55 (ER-04), removed his spouse’s automatic beneficiary right (EP-01), and traded ERISA creditor protection for his state’s ◻️ (ST-01). None of it was explained, none was reversible, and the fee saving that motivated it was worth a fraction of any one of them.

💡 Pro-Tips

1. Treat the rollover form as four decisions and answer them separately (§1).
2. Default to a partial rollover. Keep what needs the plan; roll the rest.
3. Ask about employer stock before anything else — NUA dies at the IRA and nowhere else.
4. Apply NUA to the lowest-basis lots only, if the plan permits specification.
5. Judge NUA on basis percentage and horizon, not on the headline saving.
6. Roll old plans into the current one before separating to widen Rule of 55 coverage (ER-04).
7. Repay any 401(k) loan before you leave, or know the deadline you are working against ◻️.
8. Pull your deferred comp election documents now — you cannot change them, but you can plan the year they land.
9. Negotiate employer-paid COBRA into severance; it is one of the more winnable asks.
10. Re-execute every beneficiary designation after any account moves (EP-01).

⚠️ Common Pitfalls

1. Rolling employer stock into an IRA and destroying NUA — irreversible, and worth five figures.
2. Electing NUA on high-basis stock, accelerating a large ordinary bill to shelter a small gain (§2).
3. Taking NUA and then holding a concentrated position because selling feels like wasting the tax move.
4. Assuming NUA shares get a step-up at death. The NUA portion does not ◻️.
5. Rolling everything to an IRA at 55+ and losing the Rule of 55 (ER-04).
6. Forgetting the outstanding plan loan, which becomes a taxable deemed distribution ◻️.
7. Assuming deferred comp can be re-timed at separation. Twelve months’ notice plus five years, or nothing ✅.
8. Treating deferred comp as a safe account rather than an unsecured claim ✅.
9. Letting a deferred-comp lump sum collide with the ACA bridge in the separation year.
10. Electing COBRA reflexively without pricing a subsidised marketplace plan (HC-01).
11. Leaving without the paperwork — cost basis records for employer stock are painful to reconstruct later.

✅ Actionable Checklist

Before your last day (most of this stops being available afterwards)

• Get the plan’s distribution policy in writing: partial/periodic, or lump sum only (ER-04)
• Ask whether the plan holds employer stock, and get the cost basis by lot
• Ask whether the plan permits lot-level specification for an NUA distribution
• Roll any old employer plans into the current plan if the Rule of 55 will matter
• Repay or plan for any outstanding 401(k) loan
• Pull deferred comp agreements and confirm the payout schedule and trigger
• Download plan statements, grant histories, and pension estimates

The rollover decision

• Answer all four questions in §1 separately, then decide how much to roll rather than whether
• Run the NUA arithmetic on basis percentage and your realistic deferral horizon (§2)
• Check your state’s IRA creditor protection if you carry liability exposure (ST-01)
• Confirm spousal consent implications before moving out of ERISA (EP-01)

The separation year

• Model total year-one MAGI: final salary, PTO payout, bonus, deferred comp, NUA basis
• Decide health coverage against that MAGI, not against last year’s (HC-01, TR-01 §5)
• Defer discretionary income events out of a deferred-comp spike year (TX-03)

After

• Re-execute beneficiary designations on every moved account (EP-01)
• Set cost-basis method to specific ID on the account holding distributed stock (TX-01)

Sources & further reading (verified August 2026)

• IRC § 402(e)(4) and IRS Topic no. 412, Lump-sum distributions — net unrealized appreciation: the lump-sum requirement, the four triggering events (separation from service, 59½, disability, death), ordinary income on cost basis, and long-term capital gains treatment of NUA on sale regardless of holding period
• IRC § 409A and 26 CFR § 1.409A-2 / -3 — initial deferral elections irrevocable before the year of service; subsequent elections requiring twelve months’ notice and a five-year further deferral; the six permitted payment events
• ERISA § 205 for the spousal consent rule the rollover leaves behind → EP-01
• TR-01 §5 for the timing of these decisions, which this page deliberately does not repeat · ER-04 for the Rule of 55 mechanics · ER-05 for what to spend once the money is out · HC-01 and HC-05 for the coverage comparison · FN-02 for the rates used in §2