NUA and LSD
If a plan allows for non-hardship inservice withdrawals – in this case one of the reasons is attaining 591/2
Can we still qualify for the NUA tax break if the withdrawal is an in-service withdrawal?
If he does a 100% liquidation of the current assets and then continues to participate in his 401(k) – does this meet the standard of a Lump Sum Distribution?
Permalink Submitted by Alan Spross on Fri, 2008-01-25 22:34
A requirement for an LSD is that the entire balance to the credit of the employee at that time be distributed. Later additional contributions do not compromise the earlier LSD. In addition, the Inst for Form 1099R allow for the “Total Distribution” box in 2b to be checked if the entire balance is distributed. To play it safe, I would recommend that the taxpayer confirm with the plan administrator that the “Total distribution” box is checked as well as the NUA figure in Box 6 because this is what the IRS looks at.
If the plan refuses to confirm this treatment, it might be wise to suspend further 401k participation until the next January so no new balances are accrued before year end.
As for attaining 59.5, this is a specific triggering event for an LSD with or without separation from service, therefore the only challenge is to make sure that the plan will code the 1099R as a total distribution despite continued participation.