NUA question
The NUA is important if you are distributing highly appreciated company stock from your tax-deferred employee-sponsored retirement plan, such as a 401(k). Upon the distribution the NUA is not subject to ordinary income tax. For this reason it may be better to transfer the company stock to a regular brokerage account instead of rolling the stock over to a tax-deferred IRA: that is, if rolled over to an IRA, the company stock’s NUA would eventually be taxed at your ordinary income tax rate (when you take distribute the stocks).
I understand the following conceptually, to a point, if someone rolls over company stock that was in their 401K into a regular brokerage account wouldn’t they have to pay taxes on it for the fact that it came from a qualified account??
Permalink Submitted by Alan Spross on Tue, 2011-05-24 02:24
The only current tax is applied to the cost basis for the NUA shares, ie the cost of the shares when they were purchased in the 401k plan. The difference between the actual value of the shares and that cost basis is the NUA. The NUA is not taxed until the shares are sold, either right away in the taxable account or years later. Up to the NUA amount per share the gain is taxed at the lower LT cap gain rate. If the shares have gains after distribution from the 401k, those gains are also taxable at the LT rate, but only after 1 year from the distribution date. If the shares are sold prior to that, additional gains are taxed at the ST rate, same as ordinary income.
NUA is considered to be IRD if the taxpayer dies still holding the shares. That means that there is no basis adjustment to the extent of the NUA per share, and the beneficiary will have to pay taxes on the NUA when sold.
Another option is that the taxpayer can change their mind after the shares are distributed. If the taxpayer decides against using NUA, they can roll the shares into an IRA within 60 days from receipt, and then the NUA is lost and the shares will be taxed at ordinary income rates when distributed from the IRA.
In summary, the NUA is eventually taxed, so the entire value of the shares are taxed (unless they were purchased with after tax contributions in the plan). But the NUA is at the lower rate and can be deferred for many years until the shares are actually sold.
Permalink Submitted by Eric Woodfill on Tue, 2011-05-24 09:57
Sorry for my ignorance regarding this subject, if the stocks are rolled out of the 401k or qualified plan wouldn’t they have to pay taxes on those stocks when they roll them into a non-qualified account regards of the NUA??
Permalink Submitted by mk foss on Tue, 2011-05-24 15:40
There is tax when the employer stock goes from the retirement plan into a brokerage account or stock certificates – the tax is imposed on the plan cost of the shares. Example – stock worth $70 per share; plan cost is $34 per share. If one share (from a lump sum distribution) is transferred to a brokerage account; the individual pays tax on the $34 per share. If he/she is under 59.5, the 10% penalty also applies to the $34. If the share is sold the same day it is received for $70 – there is $36 of long term capital gain because the NUA is triggered. If it’s sold for $72, there is $36 of long term capital gain and $2 of short term gain. Gains in excess of the NUA amount must meet a 1 year holding period.
Permalink Submitted by Eric Woodfill on Wed, 2011-05-25 11:27
Thanks, that is what I thought just wanted to confirm my understanding.