Can NUA distribution satisfy RMD
Here is the situation:
Employee is retired in 2009. In year 2010 she will liquidate/rollover her employer QRP. She expects to withdraw employer securities using the NUA rules. Can this NUA distribution satisfy the RMD for year 2010?
Also is there any update to developments with respect to notice 2009-68? The retiree has been told that she can take her after tax contributions and withdraw those separately and then contribute those funds to a Roth IRA as a rollover. The employer will not direct trustee to trustee transfer to the new Roth account. So one question is whether IRS allows a specific identification of after tax dollars – or whether notice 2009-68 indicates that the after tax dollars will be [b]prorated [/b]with pre tax dollars? The real question is how are we coming with developments with respect to 2009-68.
I thought not long ago Alan had posted a copy of the letter to IRS from American Benefits Society(?)
My impression is same as it was last month – we think IRS will require pre tax and after tax distributions from QRP to be pro-rated rather than specifically identified. Thanks in advance for your feedback!
Jim
Permalink Submitted by Alan Spross on Wed, 2010-09-15 23:03
Jim,
First, a distribution of NUA shares will be credited toward any RMD due for the year. Both the cost basis and the NUA portion values count toward the RMD, so there should be no need to hold back any other assets for the RMD as long as the total market value of the shares distributed is enough to fulfill the RMD requirement.
Sorry to say no further clarification has been issued by the IRS regarding the isolation of basis issue. And no response to the American Benefits Council letters. Notwithstanding the lack of clarity, a qualified plan is required to offer a direct rollover of assets to an IRA account under the tax code. But the employee needs to know how the 1099R forms will be issued with respect to the amount of after tax dollars in the case of a conversion. The plans currently have no guidelines requiring a breakdown of pre tax and after tax amounts for direct rollovers, but they must if a distribution is made to the employee.
For this particular employee, there is also the question of how much of the after tax amount will be allocated to the NUA shares vrs the rollover shares. Any basis assigned to the NUA shares results in a lower taxable amount for the cost basis. In other words, the taxable cost basis would be less than the cost for NUA purposes if basis is assigned to these shares.
Since the direct rollover situation remains unresolved, no reason that employee cannot go ahead with the conversion, and if future IRS rulings change things, he can recharacterize up to 10/17/2011. I feel that the IRS must make any ruling prospective since total chaos would result if they required revisions of prior year 1099R forms which would cause costly amended returns.
Permalink Submitted by mk foss on Wed, 2010-09-15 23:03
The distribution of employer shares from the qualified plan satisfy the RMD whether or not the NUA benefits are elected or applicable. It’s possible to satisfy the RMD rules with nontaxable income – the rules are designed to get money out of the plans primarily.
No update on the Notice 2009-68 issue. I’m not sure how many professional organizations are pushing for clarity – it would be interesting to know.