The pre tax amount of your distribution is allocated first to the IRA rollover. Usually, that will result in the taxable cost basis of your NUA shares being reduced by the amount of your after tax contributions. The amount of NUA per share is not affected.

In the event that your after tax contributions were high enough or your gross cost basis for the shares low enough, you might have your taxable cost basis for the NUA shares reduced to -0-, and the remaining amount of after tax contributions would then be allocated to the IRA rollover, adding basis to your IRA. You would report that on Form 8606 the next time you would otherwise have to complete an 8606 on your IRA (eg the next time you make a non deductible contribution or take a distribution from your TIRA).

Of course, you will not have to pay taxes on the after tax contributions you made, because you already paid them. Any earnings on these contributions are pre tax and will be part of the pre tax amount rolled to the IRA. I assume you did a direct IRA rollover to avoid the 20% withholding. If so, you will get a 1099R for the IRA rollover and another 1099R for the distribution of the company stock shares with the amount of NUA shown in Box 6.

Don’t get confused by the amount of after tax contributions you made to the plan and the cost basis amount for NUA purposes. These are entirely different forms of basis. You will track your NUA amount on a per share basis and when you eventually sell the NUA shares, gains up to the amount of NUA per share are taxed at the lower LT rates. If the shares continue to gain after distribution from the plan, the additional gain per share is taxed at short term rates if you sell in the first year. After that all your gains are LT gains.

Most important is that you are overly exposed to just one stock (remember Enron, World Com, Lehman Bros, etc) that could be entirely wiped out. You may want to sell some of your NUA shares sooner rather than later in order to be more safely diversified.

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You don’t have a choice, since the IRA rollover applies pre tax amounts before any after tax amounts. Unless you have a very large after tax amount, that will result in all of the after tax basis being applied to the NUA shares. And that is a good thing since taxes on the cost basis will be reduced for the year of the lump sum distribution. If after tax funds went into the IRA, you would only get credit for them over a very long period as they could only come out on a pro rated basis with each IRA distribution.

For example, if your after tax basis was 20k and your NUA cost basis for the shares distributed to your taxable account was 50k, the result is that your taxable income for the NUA shares is reduced to 30k, so you get immediate benefit.

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