NUA Trigger Timeline

Submitted by Anthony Romano on Tue, 2013-11-26 21:23

Is there a time restriction to claim the triggering event for NUA. I am 62 and I retired Dec. 31,2010.

Is it too late for me to take advantage of NUA?



Submitted by Alan - IRA critic on Tue, 2013-11-26 23:43

There is no stated time limit, but you must take your LSD before you take any other distributions in intervening years. In your case, your triggering events of separation and reaching 59.5 came very close together. As long as you did not take a plan distribution after that later of those two triggering events and before the year of your LSD, you can still utilize NUA. You couldn’t delay the LSD longer than the year you reach 70.5 because the plan is required to distribute an RMD to you at that time so that year is the longest you could wait and retain the NUA option.

Submitted by Anthony Romano on Wed, 2013-11-27 00:35

Great Thanks Alan- Can you also please confirm the way this is done is: I should  take a LSD from the IRA-  Put the company stock into a brokerage account- Roll of the remainder of the inivestments(mutual funds) into a Roth IRA.- Than I pay ordinary income on my cost basis of the company stock and long term capital gains on the profit from the stock. The mutual funds would be taxed as ordinary income if it is going into a Roth IRA. By the way, does it have to be a Roth or can I just change custodians.

Submitted by Tom Harwood on Tue, 2018-02-06 17:29

I read a recent article that says you must utilize NUA within one year of a triggering event,. If I haven’t taken any distributions and want to employ NUA, can I still do it more than a year after turning 59 1/2 or separation/retirement?

Submitted by Alan - IRA critic on Tue, 2018-02-06 18:11

The article is incorrect. There is no 1 year time limit, but there cannot be any years where there is an “intervening distribution” between the last triggering event and the year of the LSD. For example, if your separation from service at 56 is followed by a non LSD distribution at 57, the separation event is erased. Then you get a new triggering event at 59.5 and you are back in business. You could then not touch the account for 5 years and still do a qualified LSD at 65 and utilize NUA. So the LSD must directly follow a triggering event, but 5 years is considered to meet that requirement as long as there are no intervening distributions.

Submitted by Philip Krahn on Sun, 2020-02-16 21:12

Realize this is an old discussion, but just happened to come across it and it is very relevant to me.  I’ve talked to Fidelity, our tax advisor, and our financial advisor on this and received different answers from all of them, so looking for some better guidance.  I retired and turned 55 in 2018.  My company had two programs, a 401k and and an ESOP plan.  Both were funded with pre-tax $ entirely, the ESOP is 100% company stock.  In August of 2018, I rolled over the 401k to an IRA at another brokerage where I have most of my investments.  I want to eventually use the NUA strategy on my ESOP since my cost basis is around 30% of the market value, depending on how the stock is doing.  Fidelity’s guidance was that I then had until the end of the year to take my ESOP out and be eligible for NUA treatment on it, or wait until I turn 59 1/2.  I decided to hold off since I had worked part of the year, and the additional income due to the cost basis would have been a painful tax bill.  Since these were 2 separate plans, is the rollover of my 401k considered an “intervening distribution”, or am I eligible to utilize the NUA strategy on the ESOP stock plan at any time?

Submitted by Alan - IRA critic on Sun, 2020-02-16 22:42

  •  A very timely question, because I was just thinking about this a couple days ago because someone had been receiving non 404k dividends from the 401k and wanted to make an LSD from the ESOP for NUA purposes. They did not have a future triggering event to negate the dividends. I don’t recall this question being part of this old thread, but did not want to take the time to re read the entire thread.
  • I don’t even think there is a consensus on this question. Therefore, I advised the poster to call the ESOP administrator and confirm whether they would treat the ESOP distribution as an LSD and show NUA on the 1099R. I guess you know what Fidelity’s opinion is, but at least you have the option to remove all doubt by waiting until reaching 59.5 and qualifying under a new triggering event. 
  • If you do an LSD before 59.5 and the 1099R does not show NUA, you would need a very expensive PLR application to the IRS to resolve this. Now worth the cost when your cost basis is 30%, normally at the higher end for NUA to make any sense.
  • It just seems logical that since all like plans (ESOP and 401k are like plans) are subject to the LSD requirements, these same plans would also be subject to the intervening distribution rules. Never having seen any NUA article address this question, I think the reason is that they do not know the answer for sure, so they do not broach the question. Therefore, the answer remains uncertain.

Submitted by Alan - IRA critic on Wed, 2013-11-27 02:28

You probably meant to indicate the LSD comes from the 401k, not the IRA. The co stock is transferred to your brokerage account, but the rest of the plan is normally rolled into a TIRA, not a Roth. But you can roll it (or part of it) to a Roth IRA if you want to and can pay the taxes, since you will also pay ordinary income taxes on the cost basis. Determine what % of the stock value is the cost basis as NUA works best if your cost basis is under 30% of the value. The LT cap gains tax is only due when you sell the NUA shares, but beware of holding too much in only one stock as that can be dangerous. You can roll the balance of the plan to an IRA held with any custodian you want, and it would probably be the same custodian whether you elect a TIRA or a Roth IRA. But if you already have these accounts set up with different custodians, that is OK as well. If you do not have after tax contributions in the plan, it is probably better to roll the rest of the plan to a TIRA using a direct rollover to avoid withholding. Then you can convert to a Roth IRA from there is you wish and can convert small amounts each year to keep your tax bracket from increasing.

Submitted by Anthony Romano on Wed, 2013-11-27 03:39

I was thinking of Ed’s words – “Pay the taxes now before they go up and put the money in a roth”. However, I did not realize that if I rollover a 401 or IRA into a Roth that it would count as income. I am not taking it just moving it. Do you mean to tell me that money I roll over to a Roth and pay taxes on becomes part of my income for that year?

Submitted by Alan - IRA critic on Wed, 2013-11-27 04:02

Yes, exactly. A Roth conversion changes your funds to those that will be taxed now in exchange for tax free earnings growth, no more taxes, and no RMDs in the future. Because of this, a conversion is beneficial if the tax rate you pay to convert is less than what you would pay in retirement on your RMDs or other distributions. If you will be in a lower tax bracket in retirement, you should not convert. If you can’t tell and think your tax rates will be about the same now as later in retirement, the conversion might or might not be beneficial. You are probably in a low bracket now. Some people convert between retirement and the time they start SS benefits and/or RMDs. You probably would not convert the same year you did the LSD since you will also be taxed on the cost basis of the shares in that year and probably would not want additional taxable income that year.

Submitted by Bruce Steiner on Thu, 2013-11-28 15:08

Since there are other benefits to the Roth conversion, it makes sense (assuming you have nonretirement money with which to pay the tax on the conversion) not only if the tax rate on the conversion is less than the tax rate that would otherwise apply to the distributions, but also if the tax rate on the conversion is the same as, or somewhat higher (but not too much higher than) the tax rate that would otherwise apply to the distributions.The other benefits of the Roth conversion include (i) no required distributions after age 70 1/2, (ii) better asset protection, (iii) in a state that has a state estate tax, you avoid the double tax resulting from the fact that the income tax deduction for estate taxes only covers the Federal, but not the state, estate tax, and (iv) if you provide for your children in trust rather than outright (to keep their inheritance out of their estates, and to better protect against their creditors and spouses), if the child’s trust receives traditional IRA distributions, the trustees have to choose between distributing the money (which throws it into the child’s estate and exposes it to the child’s creditors and spouses) or accumulating it in the trust (where it’s likely to be taxed at the top income tax rate).  The Roth conversion avoids this tradeoff.  This is even more important under the American Taxpayer Relief Act of 2012.  See my article on that in the April 2013 issue of Trusts & Estates:  http://www.kkwc.com/library_cat/uf_Roth_Conversions_Are_More_Attractive_Under_ATRA.pdf

Submitted by Anthony Romano on Wed, 2013-12-04 01:37

I have spoken to 2 CPA’s and they are not familiar with the NUA so I have some questions to try to clarify for them: Lets say I take an LSD in 2014. I put the company stock in a brokerage account and the mutual funds in a TIRA. Question 1) Does my total LSD count as income for 2014. Question 2) Does the company stock count as income even if I don’t sell it. Question 3) Am I paying ordinary income on the cost basis of the company stock in 2014 regardless of if I sell it or not and then LT capital Gains on the company stock only in the year I sell it. If that is the case then is only the cost basis of the company stock being counted for 2014 income. If I am explaining it to a CPA I want to understand what counts towards income. 

Submitted by Anthony Romano on Wed, 2013-12-04 03:05

I have spoken to 2 CPA’s and they are not familiar with the NUA so I have some questions to try to clarify for them: Lets say I take an LSD in 2014. I put the company stock in a brokerage account and the mutual funds in a TIRA. Question 1) Does my total LSD count as income for 2014. Question 2) Does the company stock count as income even if I don’t sell it. Question 3) Am I paying ordinary income on the cost basis of the company stock in 2014 regardless of if I sell it or not and then LT capital Gains on the company stock only in the year I sell it. If that is the case then is only the cost basis of the company stock being counted for 2014 income. If I am explaining it to a CPA I want to understand what counts towards income. 

Submitted by Alan - IRA critic on Wed, 2013-12-04 03:15

  • 1) Taxable income will only be the cost basis for the NUA shares. The mutual funds and remainder of the plan will go to a TIRA in a direct rollover, so there is no withholding and no current taxes from that portion.
  • 2) Again, only the cost basis of the shares is taxable income in the LSD year. The NUA itself is not taxable until the year you sell the shares, so if you don’t sell there is no taxable income for the NUA portion.
  • 3) Yes, correct.
  • If the CPA is any good, he will listen to you, but will also verify from his many sources that what you are telling him is correct. If he does not really understand it, the return might not be done correctly. Many CPAs do not understand NUA, but should be able to do some research to figure it out. The 1099R that is issued will indicate your cost basis in box 2a, and the NUA in box 6. That should confirm what you are telling him. Just be sure that your LSD is qualified and that your entire plan balance is distributed.

 

Submitted by Anthony Romano on Wed, 2013-12-04 14:32

So when I do sell the NUA shares am I paying LT Capital Gain tax on 100% of the sale since I already paid tax on the cost basis? Or does my new cost basis now become the day I transfered the stock to the brokerage account?I am 62 and never took a distribution – Will the LSD be qualified?

Submitted by Alan - IRA critic on Wed, 2013-12-04 15:41

  • When you sell the shares, your NUA amount per share will be taxed at the LT rate. If you have further gains after the shares were distributed, these are taxed at the ST rate if you sell within one year, and the LT rate if you sell after one year. So you actually have a dual tax basis, one for the NUA achieved while the shares were in the plan, and a different calculation for any gains after the shares were distributed to you. You would report the sale on Form 8949 and Sch D as usual with an explanatory statement how the cost basis was calculated. If the shares drop when you sell, you just have less NUA taxed at the LT rate. None of the share value is taxed twice.
  • To have a qualified LSD, the entire balance of the plan and similar plans of the same employer must be entirely distributed by the end of your LSD year. Within the plan before the distribution you must first have a triggering event of which the usual ones are either separation from service or reaching 59.5. Once you have a triggering event you cannot take a distribution in a year prior to the LSD year. Such a distribution is referred to as an “intervening distribution”. SInce you never took a distribution after reaching 59.5, your LSD will be qualified. However, you are now in a serious time crunch if you want to complete it in 2013. You could still do it if the company can assure you of completing the LSD prior to year end, and they also can tell you what other company plans if any must also be distributed. You should get a quote from the plan on what your cost basis is – if much more than 30%, NUA may not be of benefit to you.
  • Here is an article containing additional detail on NUA:  http://www.docstoc.com/docs/44185698/FPA-Journal—Contribution-Revisiting-Net-Unrealized-Appreciation-A

Submitted by Anthony Romano on Wed, 2014-01-08 22:09

Alan – I went to Fidelity to start the process of rolling over from ML and taking advanyage of the NUA.. The folks at Fidelity told me that I can only take advantage of NUA if it is coming from a 401. The account with ML is an IRA. Fidelity told me you can not do the NUA with an IRA. Is that correct?

Submitted by Alan - IRA critic on Wed, 2014-01-08 23:24

Yes, they are correct. Actually, you did mention IRA in an earlier post and I responded that you probably meant 401k assuming your indication of IRA was a typo. But then in your 12/3 post, it certainly sounded like your LSD was from the 401k.  Turns out it actually was an IRA. With NUA shares, the minute those shares end up in an IRA, the possibility of NUA is eliminated even though you transferred those same stocks into the IRA. This may not turn out to be such a lost oportunity at all, not unless your cost basis on those shares was less than 30% of their current value. You lose alot of tax deferral with NUA.

Submitted by Anthony Romano on Thu, 2014-01-09 00:15

This cost basis is far less than 30%. Is there a chance that an IRA can still be considered an qualified plan if it is empolyer sponsored plan or was an employer sponsored plan befored it went to an IRA

Submitted by Alan - IRA critic on Thu, 2014-01-09 01:24

Sorry, but the tax regs are very clear that NUA is lost once the shares are deposited in any kind of IRA account, or for that matter any retirement account other than that of the employer under which the shares were purchased. Did you find out about NUA after the IRA rollover had been done? That happens quite often as many people are totally unaware of NUA, much less all the complex rules that accompany it.

Submitted by Celine Pastore on Mon, 2014-08-18 18:21

I have a client that wishes to take advantage of the NUA option for this company stock in his 401k. He recently retired and upon his request, they issued him stock certificates for the company stock portion. My understanding is that he needs to deposit those into a NQ brokerage acct and then within 60 days he can transfer the cost basis into an IRA account to avoid paying ordinary income on that portion today. He is then planning on selling the stock and paying LT capital gains this year. The problem is that Fidelity is advising him to deposit all the 401k money and the stock certificates into an IRA and then do a one time distribution of the gain portion of the stock into a NQ account. I’m afraid he will lose the NUA option if the stock is deposited into an IRA, even for a short period. What is the proper way to handle this transfer to avoid losing the NUA option?

Submitted by Alan - IRA critic on Mon, 2014-08-18 19:20

  • Fidelity is incorrect. Once shares are rolled into an IRA, all NUA potential is forfeited for those shares. To utilize NUA, a qualifiled lump sum distribution of the entire balance of the plan and similar plans of the employer must be completed and the NUA shares transferred to a taxable brokerage within 60 days of distribution. This should enable the plan to show the NUA total in Box 6 of the 1099R, which is a separate 1099R from the 1099R reporting the direct rollover of the balance of the plan. The cost basis per share will be taxable at ordinary income rates and the gains will be taxable when the shares are sold at the LT cap gain rate. Gains generated after the distribution in the first year are taxed at ST rates if shares are sold in the first 12 months following the distribution.
  • The concept of avoiding tax on the cost basis by rolling shares equal in value to the cost basis to an IRA is controversial and may not pass IRS scrutiny. This strategy dates back to PLRs 8538062 and 2002 02078 and the IRS has issued conflicting guidance on whether this strategy is allowed. My impression is that very few taxpayers have tried this and for those taxpayers the IRS may well have missed what was being done. Disallowing this has the same effect as requiring the cost basis per share to remain locked to each share of stock as would be expected rather than being treated as an aggregate total. Likewise, the NUA must also apply per share as would gains or losses occurring after the distribution of the shares from the plan.
  • Given the uncertainty of the aggregate treatment of the cost basis, is the cost basis per share low enough as a % of share value to warrant NUA utilization? Does the client have immediate need of these funds for expenses that would require him to take a current distribution either way? 

Submitted by ShipsnGiggles on Mon, 2014-08-18 20:02

Alan,Natalie Choate seems to be more optimistic regarding partial NUA rollovers.  In her book “life and death planning” she seems to state that the IRS through various PLR has blessed partial NUA rollovers.  In fact, she provides an example; “Grace” that has $1,000,000 in company stock. $300k basis/$700k NUA. Grace, 52, does a 60 day rollover where she moves $300k to a T-IRA and $700k into a taxable brokerage account.  This allocation allows Grace to pay no income taxes ano no 10% early withdrawal penalty. Are you not in agreement with Natalie?  Am I overlooking something? Thank you 

Submitted by Alan - IRA critic on Mon, 2014-08-18 20:42

I think we don’t have a clear indication. Here is a copy of a real long discussion from 2 years back:https://irahelp.com/forum-post/17504-nua-lsd-401k

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