Rollover, NUA, conversion and RMD

Submitted by Glenn Wager on Sat, 2014-12-06 05:05

A client who turns 70 years old in January 2015 just retired. He has 835K in his 401K. Of this amount, 55K is in company stock with basis of 20K (of the 20K basis 6K is after-tax) and NUA of 35K. There is a total of 91K of after tax money in the account. We are planning to roll over the account. A couple of questions:

1) We are considering withdrawing the stock “in-kind”. The taxable basis is 14K (20K less the 6K after tax). Since the client will have a required distribution in 2015, if we wait until January to process the rollover, can the taxable portion of the basis, approximately 14K, be used to satisfy part of the 2015 RMD?

2) Ideally we would like to rollover the rest of the 401K with the pre tax portion going to the client’s IRA and the after tax portion going to his Roth. We spoke to the trustee and they indicated that they will mail two checks to the client: one for the pretax portion of the account made payable to the IRA trustee and the other made payable to the client for the after tax portion of the account. Would this preclude the rollover/conversion of the after-tax money to his Roth under the recently issued guidelines? Or can he roll it over/convert it under the 60 day rule?
And if he can roll it over/convert it, can he do the full 91K or is he limited to 85K since 6K is part of the basis in the stock?

Thank you in advance for your time.

Glenn



Submitted by Alan - IRA critic on Sat, 2014-12-06 16:26

  1. Any amounts distributed apply toward the RMD. That includes the entire 55k.
  2. I suggest waiting a couple weeks after the stock distribution is processed before proceeding with the rest of the distribution so that the plan does not treat the entire package as a single distribution. This will also help in documenting that the stock distribution was done first and satisfied the entire RMD. The remaining 780k should be requested in terms of taxable/non taxable amounts with dollar amounts added only for clarification. For example, request “a direct rollover of the taxable funds remaining in the plan (695k) to my traditional IRA”. The non taxable balance (85k) can be either directly rolled to the Roth IRA or if the plan will not do that a check for the 85k can be issued to the client who can then do a 60 day rollover to the Roth. This is permitted under Notice 2014-54. The 6k of after tax funds allocated to the stock distribution cannot be rolled over nor can any of the shares used for NUA purposes. That leaves 85k for the Roth IRA.
  3. Note that there will be a separate 1099R for the direct rollover. The two distributions made to the client may be shown on two 1099R forms or combined on one with the current year taxable amount of 14k showing in Box 2a.
  4. If the plan will only complete this as a single transaction, then client needs to be sure the 1099R forms will be completed in a way that allows him to report this with the desired result, that being a total 2a amount of 14k. 

Submitted by Glenn Wager on Wed, 2015-01-28 19:19

Good afternoonn.  I need some additional input on the below situation.  Our plan was initiate the stock distribution after 1/1/15.  Unfortunately, the client passed away unexpectedly shortly after the beginning of the year.  His wife is the sole beneficiary on the account.  Since client was going to reach age 70.5 in 2015, the stock distribution was going to satisfy his RMD for the year and we were going to treat the gain on the stock as NUA.  Does the wife still have this option? Or did we lose the ability to utilize NUA when the client passed away?  Thanks again in advance for your help. Glenn

Submitted by Alan - IRA critic on Wed, 2015-01-28 20:33

Yes, the surviving spouse or other plan beneficiary inherits the same NUA options as the employee had, and could request the qualified LSD to implement it. However, by passing prior to client’s RBD, the 2015 RMD is becomes “unrequired” and there is no year of death RMD due, so the first beneficiary RMD will be in 2016. If it is desired that the employer shares distribution satisfy the surviving spouse’s first RMD, the LSD will have to wait until 2016, but I am not sure that works out best. To analyze the options for the surviving spouse, will need to know if wife was sole beneficiary on the plan and when she will or did reach 70.5.

Submitted by Glenn Wager on Thu, 2015-01-29 03:19

Alan, as always thank for your help.  I was not aware that the 2015 distribution would become unrequired.  The wife is the sole beneficiary and she is only 64 years old.  Since it is still an option, I anticipate that we will still take the stock in kind to utilize the NUA and will then rollover the balance of the 401K to her IRA (pre tax dollars) and Roth IRA (after tax dollars).  Do you see any issues with that approach?

Submitted by Alan - IRA critic on Thu, 2015-01-29 21:07

  • No issues. His premature death has changed the strategy of having the employer shares satisfy the 2015 RMD as part of the LSD. Now there is no 2015 RMD, but the LSD should still be done this year. Roughly, it looks like only the 14k would be taxable as the taxable portion of the co share cost basis. The rest of the plan would be directly rolled into a TIRA (695k) and Roth IRA (85k) as part of a single request per Notice 2014-54.
  • Since surviving spouse will not reach RMD age for several years, the 695k rolled into her TIRA (owned TIRA, not inherited) will not have to be distributed until RMDs start, but she can still draw on it penalty free. In the meantime, it may be possible to diversify out of the co shares at a rate of 15% and maybe even 0% if she is under the top of the 15% bracket.  If this is her first Roth contribution, since the 85k was non taxable, she could draw out up to 85 k tax and penalty free anytime, no RMDs, and earnings on the 85 tax free only after 2019.
  • Taxable numbers depends on how much of the after tax contributions to the plan are assigned to the co stock per the plan’s assignment of AT contribution regimen.

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