Not enough to cover RMD after NUA Lum Sum Distribution?
Hi, I reached 70.5 this month. I understand I have to take RMD either this year or before next April. my company’s 401k plan has about $400000 of company stocks and only $10000 cash. and my first RMD will be around $14000 based on last year’s (12/31/2011) 401k total. My question is :If I do a lum sum distribution with NUA rule now and transfer all my stocks to an outside account, and rollover the $10000 cash to a rollover IRA, then my total IRA value will be less than $14000. should I recalculate my RMD ?? If I do have $14000 IRA to cover the originally calculated RMD (I can convert $4000 of my stocks to cash before NUA LSD), do I need to take all of them out ? Thanks.
Permalink Submitted by mk foss on Tue, 2012-09-25 16:45
The stock distribution will qualify as your RMD.
Permalink Submitted by Peter Foley on Tue, 2012-09-25 17:51
So, in that case, my stock NUA distribution now will qualify my 2012 RMD. For 2013, I will calculate my RMD based on $10000 IRA, is this correct ? Thanks.
Permalink Submitted by Alan Spross on Tue, 2012-09-25 19:06
Almost correct.
Your 2012 401k plan RMD will be satisfied by distribution of the NUA shares.
Your 2012 IRA RMD will be based on your 12/31/2011 IRA value (about 4,000?).
Your 2013 IRA RMD will be based on your 12/31/2012 IRA value, and that value will be around 14,000.
It’s not clear whether your LSD will be qualified for NUA or not. It seems odd that your entire plan is all company stock except for 10,000. A qualifying LSD must be taken following a triggering event and there cannot be years in between where you take distributions, known as intervening distributions.
What is your triggering event, reaching 59.5 or separation from service?
Since the latest triggering event, were there any years in which you took distributions directly from the plan?
Permalink Submitted by Peter Foley on Tue, 2012-09-25 21:37
Thanks Alan, To clear a few things. I think I qualify for LSD due to separation from service and never did 401k distributions of any kind. I had more cash in my 401k before, but I exchanged most of the cash to company stocks last year. So I only have about $10000 cash in my 401k now. I do not have any IRA account at 12/31/2011, I guess I won’t have any 2012 IRA RMD. I hope this make sense and they are all correct.
Permalink Submitted by Alan Spross on Wed, 2012-09-26 00:31
OK – sounds like you are eligible for the LSD, but this is your last year of eligibility because your RMD would be an intervening distribution if you took it in a year before your LSD. That said, your first RMD can be postponed to 4/1 of the year following the year you reach 70.5, so if you did not take your first RMD this year, you could do two RMDs next year and the LSD for NUA purposes.
That said, even though you appear eligible for NUA, you have a high cost basis %. That entire cost basis will be taxable to you in the LSD year, meaning that in addition to your RMD you will have a large amount of taxable ordinary income on the cost basis and this could inflate your tax bracket. Unless you need these funds for expenses in the next couple years, using NUA with a high cost basis is probably unwise. If you need some of this money for expenses, remember that you can use NUA with only a portion of your stocks and roll over the rest to an IRA. You can sell the other shares either in the plan or in the IRA after the rollover to provide needed diversification. DIversification should trump even tax considerations (think Enron, Worldcom, Lehman Bros etc).
Perhaps there is another reason to consider NUA in this situation, but the need to use the sales proceeds for current expenses is the only benefit I can think of.
Permalink Submitted by Peter Foley on Wed, 2012-09-26 16:02
Thank you for pointing out the timing of the RMDs and NUA, I’ll look at the calender again to figure out when is the best time to do this. About the stock cost base, my base is around $80000 (out of $400000 total value), so I think I am OK on that, I can convert more high cost shares into cash if I want to, but I don’t want to end up with a big IRA account (and RMDs later), that was the original reason to do the NUA so to avoid RMDs down the road. I don’t really need to sell these stocks for cash, so I just want to leave it there and not to touch it. Anyway, Thanks again, really appreciated.