NUA post-trigger event rules
Hi,
Just want to confirm: Does taking after-tax contributions from a 401k after a trigger event (separation from service) void NUA? Have a prospect who unfortunately took out his after-tax contributions a month after leaving the company, and now wants to do NUA. I don’t believe there is any exception for after-tax contributions, but just want to be sure before confirming that he cannot use NUA now.
Fortunately, he is under 59 1/2 and can wait until that trigger in a couple of years.
Any feedback appreciated.
Thanks!
Permalink Submitted by Alan Spross on Thu, 2010-12-09 18:48
You are correct. The after tax distribution is indeed an intervening distribution and pushes the qualified LSD back to the next triggering event, which is apparently turning 59.5. But if the after tax distribution was taken THIS year, the LSD could still be done this year, although it is dangerously late in the year to start an LSD effort. In other words, a distribution does not become an intervening distribution until the year ends and the LSD has not been completed in that year.
So if he must wait until 59.5 anyway, there is no harm in taking other intervening distributions prior to that, as he is already forced to wait to 59.5. Since direct distributions are penalty free if he separated at 55 or later, taking distributions from the plan can eliminate the need to establish a SEPP with all hit formal requirements.
While he might accumulate more NUA by waiting, there is also the chance of higher LT cap gain rates by the time he can do the LSD.