NUA
Client just turned 70 and has never taken a distribution from her 401k. She is planning to take her first RMD by year end 2008. However, she does want to use NUA for her Citi stock position. Am I correct that she must do the Lump Sum Distribution – using the NUA for the stock – before she takes any RMD. I am basing this on Ed Slott’s article in FInancial Planning magazine of July 2006.
Permalink Submitted by [email protected] on Wed, 2008-09-03 18:24
Carolyn, I am sure this to be correct. With “C” down so far you may want to reconsider using NUA? Best wishes. Jesse Vitagliano
Permalink Submitted by Alan Spross on Wed, 2008-09-03 18:27
She must take a qualified LSD in order to utilize NUA, but the distribution of shares, including both the cost basis and the NUA will count toward satisfying the RMD. The taxable cost basis is usually sufficient to more than cover the RMD amount. The first distribution from the plan is considered the RMD for the year, therefore the share transfer should be done first, and the direct rollover of other assets second, but all assets in the plan or similar plans must be distributed prior to year end.
In Citi’s case, while the shares have been hammered and the NUA substantially reduced, it is possible that the recovery of share price after the distribution may be part of the reason to still consider NUA. Gains after distribution are taxed short term for the first year in the taxable account, but after that, both the NUA and additional gains will be taxed as LT gains. However, the NUA value per share will still need to be tracked, as it will remain IRD (no step up) while additional gains are not IRD.
Note: You indicated she “just turned 70”. If that means in July or later, she does not turn 70.5 till next year and this is not an RMD year. If her birthday is in June or earlier, then this IS an RMD distribution year.
Permalink Submitted by Carolyn Staub on Wed, 2008-09-03 20:14
Client doesn’t want to ditch Citi – and she doesn’t want to have to take 2 RMDs next year – so I am thinking she will be best served by doing the LSD before year-end. ANy other comments? Thank you!
Permalink Submitted by Alan Spross on Wed, 2008-09-03 20:22
If the NUA is viable, you are correct.
If the client were to start taking RMDs without doing the LSD, the chance for NUA would be lost since the RMDs would be considered “intervening distributions”. Since she has not taken any distributions since her last triggering event, either separation from service or turning 59.5, she can still take a qualified LSD. So as you have indicated, it is now decision time with respect to the NUA.