NUA to ROTH Conversion
What is your view regarding the taxation of NUA securities rolled over from a qualifed plan (QP) to a ROTH?
Some are saying that a loophole is created under 2006 PPA, section 408A(d)(3)(A) of the Roth IRA conversion rules regarding the taxation of NUA securities i.e one can roll over the NUA amount from a QP to a ROTH and not be taxed on the NUA.
Thanks
John
Permalink Submitted by Alan Spross on Tue, 2009-07-21 20:27
John,
I do not see any evidence of a loophole. For NUA, the lump sum distribution must be made to the recipient, not to the recipient’s IRA, either Roth or TIRA. While a distribution of employer shares can be rolled over or even converted to a Roth IRA, NUA is erased and the taxable part of a conversion rollover is the full market value of the shares less any after tax contributions allocated to the shares.
In letter rulings the IRS has consistently ruled that once an NUA share is contributed to an IRA, even for an hour, the NUA potential of such shares is permanently terminated. Also, note that in the PPA, Sec 408A(d)(3) is amended to reflect that a rollover to a Roth IRA from another type of IRA includes the rollover to a Roth IRA from any “eligible retirement plan” such as a 401k.
Although the NUA would be taxed like any other Roth conversion, the potential of tax free earnings and tax free dividends on the shares may well exceed the value of paying LT cap gain rates on NUA that are not guaranteed to remain at 15% beyond 2010. It would also solve the problem of diversification by holding too much in employer shares. A Roth is also a better asset to inherit than an IRD asset as NUA does not get a step up in value at the death of the owner. NUA appears to be a better option if the shares are to be sold quickly in the taxable account due to a current need for funds.