NUAs and MRDs from 401K plans

Submitted by Harold Geller on Fri, 2014-03-14 18:07

I plan on taking an NUA (company stock) distribution from a 401k plan. For tax purposes, is the distribution valued at the full value of the stock at the time of the distribution (say $40K), or is it valued at my cost basis (say $10K). In other words,could I count $40K toward my MRD or would it be $10K ? What would the 1099 or other tax forms sent by the plan administer say?

Thanks for your help



Submitted by Alan - IRA critic on Fri, 2014-03-14 18:37

The full value of your distribution, both the cost basis and the NUA as shown in the Box 1 total, are credited against your RMD amount. That typically means your RMD is fully satisfied by the distribution of the shares. You must complete a qualified lump sum distribution of the entire plan and similar plans of the company in order to utilize NUA, but the intervening distribution rules effectively mean that this has to be your first RMD distribution year for this plan. You cannot just take your RMD as stock and leave a balance in the plan after the end of this year. If the lump sum distribution was not properly completed, the plan would not show an NUA amount in Box 6 of the 1099R. Did you just retire from this company?

Submitted by Harold Geller on Fri, 2014-03-14 19:47

Thanks so much for your detailed reply. I retired in December 2010 and need to exit from the 401 plan by April 1, 2014. I am required to take MRDs (first distributios) before than for both 2013 and 2014. To my surprise the Administrater has just automatically taken these RMDs from across all of my holdings, including the stocks, and will send me a check for the RMD distributions. I now want to take the NUA, which means that I will have distributions from the 401k larger than the RMDs. The remaining balance of the 401k will be converted/rolled over into an IRA. Can I deposit the excess distribution from the 401 (full value of the NUA) into the IRA if I do so witin 60 days?

Submitted by Alan - IRA critic on Fri, 2014-03-14 20:13

I assume then you have not taken any distributions from this plan until this year.Technically, you cannot do as planned with the rollover because the first distributions taken in any RMD year are deemed to apply to the RMD and therefore you cannot roll them over. But if you could get the stocks distributed on the same day as the other assets, then you could roll the other assets over to an IRA within 60 days and have the stocks distributed to your brokerage account satisfy the RMD. Therefore, timing is the challenge here. Finally, the entire balance of the plan must be rolled over, presumably as a direct rollover before year end to complete the qualified LSD. There should be no withholding taken on what the plan considers to be RMDs because the plan does not consider them eligible for rollover, but if the stocks are distributed on the same day, the plan could consider taking 20% withholding out of the rest of the distribution. There should be no withholding on the stocks because they are NUA shares. In summary, what you have now is a timing problem.

Submitted by Harold Geller on Sat, 2014-03-15 00:14

Thanks again, but I am confused. The plan admin has already distributed 2013 and 2014 MRDs on cosecutive days this week so I cannot undo that. But suppose that the MRDs are $40k,and $40k for each of the 2 years and the NUA value is also $40k with a cost basis of $10k. If I now exercise the NUA, the 1099R would show $120k in box 1 (Gross Dist), Box 2 (taxable Amt) would be $90k and box 6 (NUA) would show $30k. Is this correct? Then box 1 would show a  dist of $40k over the required amount. So why could I not roll over $40k into the IRA?Or can I at least rollover the $10k cost basis of the NUA? 

Submitted by Alan - IRA critic on Sat, 2014-03-15 03:31

  • You are correct with respect to how the 1099R would be completed. But for the rollover, see Q&A 7 in the attached IRS Reg 1.402(c)(2): http://www.gpo.gov/fdsys/pkg/CFR-2013-title26-vol5/pdf/CFR-2013-title26-vol5-sec1-402c-2.pdf. This explains that the first distributions in an RMD year are must be allocated to the RMDs due for that year and cannot be rolled over because they are RMDs. Once the RMDs (80k) are satisfied, additional distributions can be rolled over, but the additional distribution is the stock and you cannot roll over the stock and still use NUA. You could roll over the shares within 60 days and thereby reduce the taxable amount from 90k to 80k, but technically you cannot roll over the earlier distribution instead even though it is still within 60 days. If you did roll over the earlier distribution, what happens is your RMD is still satisfied, but then you have an excess contribution to your IRA. The only way to eliminate this situation is to either complete the LSD before RMDs are due or make sure the stock distribution comes out first from the plan in an RMD year. This is the same rule that causes problems if a taxpayer does a conversion in an RMD year before taking the RMD. It’s got to be the other way around.
  • Of course, you can still utilize NUA if you wish, it just will not satisfy your RMD as well. Your taxable amount this year would be 90k.

Submitted by Helen Chase on Tue, 2014-09-02 17:59

I am very interested in this and previous Q&A’s posted on this site regarding treatment of cost basis AND net unrealized appreciation portions of in-kind distribution of company stock as they pertain to MRD, since the opinion expressed supports my common-sense assumption that BOTH the cost basis and the NUA qualify for satisfaction of the MRD.  However, I have been unable to find anything such as a Private Letter Ruling or other “official” documentation to support this view, while on the other hand, the administrator of my 401k plan has asserted that ONLY the cost basis can be counted towards the MRD.  Can you be of any help in my search for collaborative documentation on this matter?

Submitted by Alan - IRA critic on Tue, 2014-09-02 18:16

You are correct. Both the NUA and the cost basis count toward the RMD (Box 1 of the 1099R), and this is specifically described in Q&A 9 of the following IRS Reg 1.401(a)(9)-5:  http://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5

Submitted by Helen Chase on Tue, 2014-09-02 18:41

Thank you SO much!!  I have read the referenced Q&A and it perfectly covers the specifics.  You have saved me from what could’ve become a long drawn-out argument with the plan administrator, and I’m so grateful for your help and very quick response!

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