NUA on Decedant 401k?
I have a recently widowed client whose husband’s 401k has approx 25% in stock of his employer. We are in the process of rolling over the 401k to her IRA. My question is will she qualify for net unrealized appreciation on the stock if we choose to take delivery instead of liquidating the stock and rolling to her IRA.
Permalink Submitted by Alan Spross on Wed, 2008-10-01 20:15
Yes. The employee’s death is a new triggering event, so even if the employee was not eligible for an LSD for NUA purposes, the surviving beneficiary will be eligible. Of course, she will need to take a qualified LSD including all the assets of plans of the employer of similar type.
She inherits the employee’s cost basis, and the NUA will fluctuate with the value of the shares. As is typical, NUA is not very compelling if the cost basis exceeds 30% of the share value. When she is taxed on the cost basis there will be no early withdrawal penalty regardless of her age since the entire account is inherited.
A subjective judgement will have to be made with respect to how long the top LTCG tax rate will remain at current levels, particularly for higher marginal bracket taxpayers.
The most important consideration should continue to be proper diversification, and that should trump any tax benefits.