NUA help!!!
Have a considerable amt of money in a 401K in company stk from my husband’s passing nearly 4 yrs ago and can’t decide if I should go with an IRA Rollover or 50%NUA/50% IRA. Do not need the money to live and will not be doing RMD until around 2016. Have consulted with various financial advisors and I have been told in my case it is not black and white and there is no correct answer and some said to rollover 100% and some also think I should cover my bets against higher taxes and go 50/50. Also, thinking about possibly coverting some of my IRA to a Roth in the future but not convinced yet because it would mean paying huge amts in taxes. Thinking about possibly using some of the cash from the NUA portion sold to pay the income taxes if I convert. Must sell a good portion of my postion starting when the transfer from the 401K is finalized whether it goes 50/50 or just 100% IRA. I just have too much in one stk and I have known this for a very long time. The cash flows and wealth projections do show more value doing a 100% IRA but that’s based on present income tax rates and a lot of projections. Would appreciate any input. Not looking forward to paying taxes around $300,000 in 2008 if all the NUA stock is sold. Most likely will sell some in 2009 as well to keep the tax bill lower and not “panic” sell in this market. However, in the future the RMDs could be a lot of money. At the moment, my beneficiaries are two young people in their early 20s and they could stretch an IRA as well as a Roth if I convert. The beneficiary scenario could also change. We never know what the future holds so I don’t want my current beneficiaries to influence my decision but I must take it into consideration. Having a really hard time for a long time trying to make this decision. The other thing in this situation is that my estate will most likely be subject to estate tax unless the exemption is increased, so that’s why the Roth may be a good option and also it would help to possibly have additional money outside the IRA to pay estate taxes. Really appreciate any thoughts. I know all about how the NUA tax treatment works, the favorable long term capital gain rate at the moment and getting it done in 1 calendar yr, etc. I just can’t decide. I really need some help.
Thank you,
Judy
Permalink Submitted by Alan Spross on Fri, 2008-09-26 21:58
You have the basics well in hand. But I would not limit my thinking to 100% or 50-50, as you can hedge by going anywhere in between. If you have not done so, be sure you find out if the cost basis for employer stock is averaged or there is the opportunity to select various lots with a lower cost basis for your NUA distribution, and roll the others to an IRA or sell them in the plan for instant diversification. I do not think NUA is very compelling once your cost basis hits about 30%, but that is a generalization.
I assume you are aware of the concept of intervening distributions and triggering events in making sure your LSD is qualified.
Another very strong factor here is what economic sector your shares are in, as this would make diversification even a larger factor than it already it, and it already should be the prime factor by far. I know someone who had a 4% cost basis in Lehman in January, and you know what happened there. He went from considering an LSD to a total wipe out in a few weeks time.
With respect to the unified credit, I think you can bank on 3.5 million or perhaps 5 milliion, but you also must consider the various states where you live or might live later on. Many have much lower estate tax credits or inheritance taxes for non spouse beneficiaries. Some have both.
Also, it may be good that you are planning to sell shares shortly after the LSD. This helps your chances that the LT gain rate will still be 15% when you sell and not back over 20%.
You might also deferring SS retirement benefits until after you are done with doing incremental conversions. If you are in good health and have a long life expectancy, eliminating the early retirement penalty or securing the 8% annual bonus per year after age 66 is a very cheap way to purchase lifetime annuity income with a COLA. A study showed this is like purchasing an immediate annuity at a cost of about 35% less than the lowest cost immediate annuity from Vanguard or other low cost provider. Also, no worry about the insurance company going BK.
Could be your largest challenge is information paralysis given the complexity and chaotic economic times, which could prevent you from acting. On the other hand, you should not panic either. There are some NUA calculators and conversion calculators on line, but none of them incorporate the finer minor variables or personal issues.
Permalink Submitted by Bruce Steiner on Sun, 2008-09-28 00:17
A forum such as this is useful for general information, but not for specific legal advice. There are too many variables, and changes in the assumptions can affect the results.
If the current tax on the NUA would be $300,000, then the basis of the employer securities is in the high 6 figures, and the value of the employer securities has to be at least a few million dollars. You might want to make some reasonable assumptions and do a spreadsheet comparing the alternatives through the end of your beneficiaries’ distribution period if you do the rollover.
The importance of diversification will depend on the nature and extent of your other assets.
Given the amount involved, you might also want to consult with competent tax/estates counsel.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL