NUA right strategy?
I have a client that is 54 yrs old still working & making contributions. He has 300k+ in employer stock (employer matching contributions) in 401k, we already did an inservice transfer of the other 1/2 of 401k to IRA. Client is worried about diversification and would like to sell the stock within the 401k and reallocate to mutual funds. Client will be retiring in 8 to 10 years. Should client sell the stock to diversify or consider the NUA strategy? Client has pension that would be main source of income in retirement. Client has charitable intentions and 2 children yet to attend college. Your thoughts are most welcome.
Thanks, Clara Lehman
Permalink Submitted by Alan Spross on Sat, 2008-05-31 02:41
Diversification should take priority over NUA, and greater priority depending on the amount of NUA vrs fair market value. In other words, if his cost basis is 30% of the current value, he should probably allocate as much elsewhere as if there were no NUA. However, if his cost basis is much lower, then he may wish to retain somewhat more, but not alot more. The lesson of Enron, Bear Stearns and others illustrates the need not to be overweight in company stock. And if the client has other specific concerns about the company, he should sell even more of it. Another factor to consider are the new provisions allowing him to diversify out of employer matching shares periodically. He will want to continue maxing out his employer match, and what the match is composed of may influence how much of the current shares he keeps. When new company shares keep accumulating, the NUA value gets diluted. If there is an opportunity for the match to be in other than employer stock, he should do that as it will help with diversification AND it will keep his cost basis on NUA shares down. A wild card with all this is what happens to the 15% LT cap gains rates after 2010. They could go up and that would also reduce the inherent value of NUA.
He may have a flexible plan given the in service distribution well prior to age 59.5. Most plans only allow loans or hardship distributions prior to 59.5.