401k rollover and conversion to a roth ira
Client has 401k of employer stock and the stock has dropped dramatically in value if he coverts to a roth ira will the value be the current value of the stock or the value when the stock was bought? Is a better solution to this problem such as the NUA that may allow he to take a loss and the repurchase the stock. I’m just trying to consider all the options. Thank you for your help.
Permalink Submitted by Alan Spross on Wed, 2009-03-04 20:04
A direct Roth conversion would be taxed based on the full value of the shares at the time of conversion if purchased with pre tax dollars, not the plan cost basis. Future recovery would be tax free assuming his Roth IRA attains qualified status, ie. 5 years held and client over 59.5. NUA no longer applies once shares are rolled to an IRA. If a client has after tax contributions in employer shares, the after tax portion would not be taxable upon conversion.
NUA is based on the value of the shares at the time of a lump sum distribution of the shares to a taxable account vrs the plan cost basis. Generally, the cost basis per share should be 30% or lower than the current market value. However, if the shares are left in the plan and recover the losses while in the plan, the amount of the increase would be NUA at the time of distribution. The NUA would not be taxed until the shares were sold, at the LT CG rate.
For example, if the plan cost basis is $3 per share at the time of distribution, taxes must be paid on this amount in the year of distribution. If the stock is worth $10 per share, there is $7 of NUA. Future losses would reduce the NUA and future gains back up to $10 per share would restore it. Additional gains would be taxed subject to the usual short term of long term rules upon sale. Since the cost basis is only $3, there is no loss to take unless the shares are sold for less than that.
Diversification is a potential problem due to holding these shares for a long time, both before and after the distribution date, when they represent a large portion of someone’s retirement assets.
Permalink Submitted by John Carson on Thu, 2009-03-05 02:34
Regarding the changes that take effect in 2010, is the mandatory RMD still going to be in effect when you roolover from a traditional IRA to a Roth IRA?
Permalink Submitted by Clyde Wolf on Thu, 2009-03-05 15:42
Robclement21,
One might expect the RMD on TIRAs to remain in place on a Conversion from a TIRA to a ROTH IRA. After all, the US Treasury can use the money.
That said, the same reasoning that applys to suspending the RMD for 2009, I would guess that reasoning will be extended to 2010. But only Congress knows for sure.