NUA Stock Basis & 1099R

Submitted by Liz Miles on Thu, 2012-01-26 02:35

Last year my husband rolled over his 401K to an IRA and took 3000 shares of his company stock as like-kind into a brokerage account for NUA purposes. The cost basis for the stock is $19 and the FMV at time of the transfer is $45. He immediately sold 400 shares at $45 per share. If I understand correctly the basis for the stock is the $19 so the amount subject to long term capital gain is $10,400 (400 x ($45 – $19)). He plans to sell 600 more shares this year. Will the basis for all of the remaining shares always be $19 regardless of when they are sold?

Also, the 1099R he received has the total amount that was in his 401K in Box 1 (Gross Distribution) and Code G as the Distribution Code in Box 7. The Total Distribution box is checked. There is nothing in Box 2 (Taxable Amount) or in Box 6 (Net Unrealized Appreciation). Shouldn’t $57,000 (cost basis amount 3000 x $19) be in Box 2a and $78,000 (3000 x ($45 – $19)) be in Box 6?

I’m having a hard time understanding the reason for paying ordinary income tax on the basis amount (3000 x $19 = $57,000) in the year of the rollover. Is this kind of like paying for the privilege of paying capital gain tax on the shares that are sold in the future?

Thanks in advance for your help!

Liz



Submitted by mk foss on Thu, 2012-01-26 03:56

Employers often issue only one 1099R for a retiree even when there is a combination of rollover and taxable distribution.

Without using the NUA 100% of the distribution would be taxed as ordinary income. The benefit allows the former employee to pay tax just on the plan cost of the shares and defer the tax on appreciation until the stock is sold. It doesn’t seem like paying for the capital gain privilege to me, it’s a good deal to avoid ordinary income tax forever on the appreciation. The basis of $19 per share is used to determine gain or loss until all of the NUA shares are sold.

For the first year after the stock is issued, the long term gain from NUA is $26 per share. If the shares are sold for more than $45 a share in the first year, there could be some short term gain. After the shares have been held a full year, everything is long term capital gain.



Submitted by Alan Spross on Thu, 2012-01-26 04:11

NOTE: Typed this while Mary Kay was posting. Most of this is in agreement with her post, except that current 1099R Instructions indicate that the G code cannot be combined with a taxable distribution 1099R.

Your math is correct regarding the LT gain amount. The remaining shares will have the same cost basis, but for gains above $45, the short term CG rate applies until the shares have been in the taxable brokerage account for over 1 year. After that all gains are LT. Any reduction below $45 is simply LT cap gain that disappeared.

The 1099R coded G only includes the direct rollover portion that went into the IRA. The other 1099R must be separate and if you do not have it, you should get it in a short time. Maybe give it two weeks before contacting the plan administrator to inquire about it. Again, your math is correct, ie the Box 1 amount should equal the Box 2a and the Box 6 NUA amounts.

I guess you could say the trade off for the cap gain rates, which are unique for retirement account distributions, is the immediate ordinary tax on the cost basis. NUA is most viable when the cost basis is under 30% of the value. His is 42.2%, and those with a cost basis this high would usually have a need for the money and sell right away. If the cash is needed then paying the lower LT rate vrs ordinary income on the entire distribution is a bargain.

If there was any after tax contributions in the plan, then things get more confusing, but he apparently did not have those.

Above all, the need for diversification should trump the tax benefits. Holding too much in one stock is dangerous as illustrated by Lehman Bros and Enron, both of which imploded within a very short time.



Submitted by Liz Miles on Wed, 2012-03-21 18:44

Hi, I am in the process of preparing our taxes so I came back to reread these posts regarding the NUA. Mary Kay said, “The basis of $19 per share is used to determine gain or loss [b]until all of the NUA shares are sold[/b].” So, what is the basis after all the NUA shares are sold? Will it be the $45 that the stock was worth when the distribution took place? This seems like a lot of recordkeeping to distinguish between the two “categories” of shares and their different basis and when they have all been sold.

Am I understanding it correctly?

Thanks as always!

Liz Miles



Submitted by Liz Miles on Wed, 2012-03-21 19:05

Let me try to clarify my question above. The 3000 shares that were transferred into a brokerage account are the only shares in the account. So when Mary Kay said that $19 is the basis until all the NUA shares are sold are you talking about all 3000 shares? Therefore, all shares in that account will ALWAYS have a basis of $19?

What I was trying to find out is there a difference in the amount ($57,000 in Box 2a on 1099-R) that we are paying taxes on this year as ordinary income and the $78,000 (NUA in Box 6 of 1099-R)? In other words, do I have to keep up with these different amounts after my taxes are filed this year?

I hope this makes sense. This NUA stuff is confusing. 🙂

Thanks!

Liz



Submitted by Alan Spross on Wed, 2012-03-21 20:10

To keep this as simple as possible, let’s assume no shares are sold until over a year passes from the distribution from the plan, and that you are NOT having dividends reinvested in more shares in the brokerage account since new shares reinvested from dividends are not NUA shares and will have their own cost basis.

Taxes will have been paid on the 57,000 and the basis per share in the brokerage account is $19 per share. Every share sold will have a Sch D cost basis of $19 and any excess will be the gain reported at the lower LT cap gain rate. If the shares increase 10% in value, you will just have a larger LT cap gain to report, and if they drop a lower LT cap gain. If they drop below 19 per share and are sold, then you have a LT cap loss.

If shares are sold within the first year from distribution date, any gain in excess of the value per share when distributed will be taxed as a ST gain.

I don’t see keeping track of this as particularly difficult since all these shares have the same basis and you already know that it is $19 per share.

You should put diversification ahead of taxes, so if there is any doubt about the company’s prospects, some or all of the shares should be sold at least until this one holding represents less than 10% of your retirement assets, preferably 5%. Since the LT cap gain rate is -0- up to the top of the 15% bracket, and probably a 60% plus chance this will be continued after 2012, you shares sold within the 15% bracket will have no taxes due, and 15% max above the 15% bracket.



Submitted by Jim Mershon on Wed, 2013-08-14 18:13

If an employer plan allows partial distribution and currently the plan is funded with mutual funds  and employer company stock; can I roll over the funds now and in a susequent year take distribution the stock and would that stock then be eligible for nua treatment?



Submitted by Alan - IRA critic on Wed, 2013-08-14 22:57

Only if you qualify for a new “triggering event”. Your partial distribution would be considered an “intervening distribution” if done after you separated and would erase the separation as your triggering event and therefore you could not use NUA until you had a new triggering event, and the last one possible other than your death would be reaching 59.5. For example, if you separated and then did a partial distribution after separation, you would have to wait until 59.5 to have a new triggering event after which you could complete the lump sum distribution. If you have already reached 59.5, then a partial distribution would disqualify you from using NUA during your lifetime. The IRS will look at your 1099R, and if the plan administrator does not understand these rules or intreprets them differently, you might still receive a 1099R showing NUA in Box 6.



Submitted by richard Berman on Fri, 2014-02-21 20:55

When I closed my 401k, I took my esop shares in the company as “as like kind” shares to take advantage of the NUA provisions of the tax laws. I sold the shares a few months after receiving them. As a result, as I understand it, I have a long term gain (the difference between the cost basis of the shares and the price of the shares when they were transferred to me out of my 401k) and a short term gain in the same sold shares (the difference between the price of the shares when they were transferred to me and the the price of the stock when I sold them). As you would expect, the brokerage firm that I sold the shares through only sent out one 1099 which reflects the sale of the shares. Since the firm didn’t know about the different cost basis, its left for me to enter the cost information on my return. To do that however, I need to enter each of the transactions which requires me to enter the gross proceeds of each transaction which causes me to have a larger gross proceeds number than was reported on my 1099. Any suggestions on how to handle? Should I just send an explanation letter to the IRS along with my return?



Submitted by Alan - IRA critic on Fri, 2014-02-21 23:26

Duplicate post.



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