NUA Basis apply towards RMD?
I have a client who is turning 70-1/2 next year and maintains assets in his 401K. He has not taken any distributions from his plan since retiring several years ago and plans on electing NUA on a substantial portion of his highly appreciated employer stock. My question is this: will the taxable basis of his stock distribution count towards his RMD for 2010 (since it will be reported as a taxable distribution), or will his RMD be reported in ADDITION to the taxable basis?
Any additional thoughts/tips on this matter are greatly appreciated, as I’m trying to help him determine whether or not it makes more sense to do his lump-sum distribution THIS year instead of next year.
Thanks in advance for your help!
Robin
Permalink Submitted by Alan Spross on Thu, 2009-11-05 20:41
Robin,
Any distribution in an RMD year counts toward the RMD for that year, so the cost basis might cover the RMD. It is also a must that the client deal with the NUA no later than next year, because an RMD is considered an intervening distribution and would disqualify the client for an NUA LSD in a later year. Sounds like there has been no intervening distributions since turning 59.5 or separating from service that would have disqualified use of NUA.
If the cost basis at least equals the RMD, it automatically includes the RMD because the first distribution in an RMD year is deemed to be the RMD. Accordingly, the taxable distribution of employer shares would be done first and would include the RMD, and then the plan balance, including the balance of other plans of a similar type can be direct rolled to a TIRA and/or Roth IRA.
Alternatively, the LSD can be done this year if you are sure to be able to complete it. All plan balances must be OUT by year end or the NUA potential is lost. If completed this year, you reduce RMDs for next year because the shares will no longer be in a retirement plan as of 12/31/09 used to determine the 2010 RMD. This also avoids debating with the plan administrator if they do not think the cost basis counts toward the 2010 RMD. But if you proceed this year, you need to be sure it can be completed by year end, and while 8 weeks should be enough, if there are any complications it could get touchy. Any after tax amounts in there to complicate the tax computations?
Permalink Submitted by Robin Ross on Fri, 2009-11-06 01:15
Alan,
He does have an after-tax basis, though the taxable basis is expected to far exceed his estimated RMD. So, based on your explanation, it appears that his RMD would be more than satisfied. I guess he’ll need to determine if it makes more sense to reduce his RMD next year by electing a LSD this year, assuming of course that he could complete the distribution by 12/31/2009.
I am curious about the statement you made regarding the plan administrator. Is it up to their discretion as to how these NUA/RMD distributions are reported or are both types simply coded as “taxable distributions” and the interpretation is left up to the participant?
Permalink Submitted by Alan Spross on Fri, 2009-11-06 01:43
There is no separate coding for the RMD, as there is for the NUA. But some administrators are prone to thinking that the cost basis or NUA portion of the LSD does not count and they want to distribute an additional amount for the RMD, which is not necessary. Any amount that correctly shows in Box 1 of the 1099R (Gross Dist) is a distribution and counts as RMD dollars. This is even true for a rollover, but since you cannot roll an RMD over, it becomes an excess IRA contribution. But the RMD was still satisfied.
I may be causing confusion by raising the issue of after tax contributions. The NUA share cost basis is the plan cost and actually has nothing to do with after tax contributions a client may have made to the plan. Plans may vary on how they allocate after tax contributions within the plan. IF they allocate some to the employer shares, the cost basis is reduced, but the amount of NUA stays the same. The taxable amount showing in Box 2a is then reduced, and this is probably best for the client.
For example, if the employer shares have a current FMV of $100 per share with a plan cost basis of $25 per share, the current ordinary income tax for the LSD is based on $25 if there are no after tax contributions. But if after tax contributions reduce the cost basis to $10 per share, then the current tax is based on $10. This does not change the cost basis of the NUA shares, they stay at $25 either way for purposes of reporting the sale of NUA shares on Sch D. If all of the after tax contribution amount is not applied to the cost basis, it would end up in a TIRA and trigger an 8606 or even in a Roth IRA if a direct Roth conversion is elected for part of the LSD.
The largest possible quagmire I can think of is someone doing an LSD including NUA, pre 1987 after tax contributions, post 86 after tax contributions, a direct Rollover to a TIRA for part of the remainder and a direct Roth conversion for the rest. I doubt there is any agreement on how the 1099R should read, and there may also be some plan provisions that handle this differently from plan to plan.