Net Unrealized Appreciation
I have a new client that worked for GE and still has his 401K with the company. He is retired and turned 70 1/2 and had to take his first RMD in 2015. He has 120K in a GE Stock fund which is a portion of his 401K. This used to be GE stock but a few years ago GE moved from having stock to a stock fund to hold their GE stock within their 401K. The funds in the stock fund were GE stock. He had never sold the stock or any part of the stock fund. My question is would he be a candidate for Net Unrealized Appreciation with this portion of his 401K? If so what information would I need to gather from GE? thank you
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 17:45
Time is running very short. Any distribution including an RMD is considered an “intervening distribution” and will disqualify the lump sum distribution from being eligible for NUA. There can be no years where an intervening distribution occurred from the same plan that holds the employer stock between the year of the triggering event (eg retirement or age 59.5 whichever is later) and the lump sum distribution. As such the lump sum distribution must be completed by the end of this year. A unitized stock fund of employer shares is eligible for NUA. The plan should be asked if there is any reason these shares would not be eligible for NUA if the LSD is done before year end, and if eligible what the cost basis per share is as a % of the current market value. If the cost basis is over 30%, then NUA is probably not beneficial unless client needs to spend this money quite soon. Then of course Cap gains will be taxed at a lower rate than ordinary income. The form of stock distribution should also be determined, but with GE I would expect that the stock fund would be converted to actual shares of GE stock which would then be transferred to a taxable brokerage account. As always, diversification should trump potential tax benefits, although since GE is itself diversified, the risks may be somewhat less in holding that stock. If GE spun off any companies in recent years, the client also holds those shares, they may also be eliglble for NUA.
Permalink Submitted by [email protected] on Fri, 2015-12-04 18:42
The RMD for 2015 was taken from another 401k account so sense there were no distributions from this 401k I should have time to run the calculations and have the client decide if it makes sense. I have not done this before so would it be helpful to get another professional like a CPA involved? thank you for your advice.
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 19:12
You could, but don’t assume the average CPA is familiar with NUA. They aren’t. Reading the tax code will not help much since many details and strategies are not found there. Some articles on the subject can be found by googling “financial planning magazine nua”. They don’t permit posting links, but you can get to them this way.
Permalink Submitted by [email protected] on Fri, 2015-12-04 19:40
if you were me who would you speak with? Do you have someone in your office that handles this?
Permalink Submitted by David Mertz on Fri, 2015-12-04 20:00
Note that, unlike IRAs, 401(k) balances from separate plans cannot be aggregated and taken from only one of the plans. Each 401(k) plan must satisfy its own RMD. If no RMD was taken yet from the GE 401(k) for 2015, an RMD for 2015 is still required to be taken from the GE 401(k). Since this is the first RMD required, it can be delayed until April 1, 2016, so perhaps the lump-sum distribution necessary to be able to apply NUA treatment could be taken in 2016 instead of 2015.
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 23:14