Net unrealized appreciation
individual is retiring and has 401k/profit sharing plan, she profit sharing contribution was made with employer stock. can this person roll 401k over to IRA and remove company stock under NUA rules with no ordinary income tax since she has on basis? Also since she is in 15% tax bracket would she be able to sell the stock and pay no long term capital gains?
Permalink Submitted by Alan - IRA critic on Tue, 2014-02-11 15:39
No. Once the shares go into an IRA, NUA is no longer possible. She must have all or a portion of the shares that she wants to use for NUA transferred to a taxable brokerage account. The balance of the plan and similar plans must also be distributed, typically as a direct rollover to an IRA. She should know what the cost basis per share is before deciding on NUA. Cost basis more than 30% makes NUA questionable unless she needs to raise cash right away by selling the NUA shares.
Permalink Submitted by Don Warnke on Tue, 2014-02-11 18:43
Since this employer stock was Profit sharing contribution, she has no basis. in this case would NUA still apply (i realize that the company stock has to go from 401k to retail account)? also since she is in 15% federal income tax bracket could she then sell the stock and pay no long term capital gains?
Permalink Submitted by Alan - IRA critic on Tue, 2014-02-11 19:34
The shares will have a cost basis equal to the value of the shares when placed in the employee’s account. This is a different form of basis than an employee has when making after tax contributions to the plan. She should request a cost basis quote from the plan before deciding on NUA. The higher the cost basis the lower the NUA amount per share. She has to pay the full ordinary income rate on the cost basis in the year of distribution. If she sells the shares and the resulting gain is still within the 15% bracket, she would pay 0 for the LT gains on her federal return, but she might have to pay something on her state return. The cost basis will be in her taxable income in the distribution year, so that might make it tougher to stay within the 15% bracket. Of course, she can sell only some of the shares this year and the rest whenever she wishes.