Not really an IRA question, but some out there might have the background
Would a in plan (401k) roth conversion prohibit the client from doing a lump sum, future NUA on the employer securities? The third party disclosure is stating that it “may”. The only thing I can think of is that the in plan conversion would generate a 1099r on the conversion, but technically there was not a distribution FROM the plan but WITHIN the plan.
Thoughts?
Permalink Submitted by Alan - IRA critic on Thu, 2016-04-07 22:15
NUA would no longer be possible or have any benefit once the shares are in the Roth 401k. Tax free distributions from a Roth account are better than LT cap gains that would be due if the shares were distributed out of the Roth. Also, per Notice 2010-84 Q 7 the tax impact when the employer shares are moved from the pre tax 401k to the designated Roth in an IRR are that the basis is not taxed, but the NUA is taxed at that time and that should be reflected in the 1099R for the IRR. Therefore, the employee should avoid including appreciated employer shares in an IRR in most cases if they intend to utilize NUA. But if they want the cost basis of the shares used to reduce the taxes due on the IRR since the cost basis is not taxed when the IRR is done, then including the shares in the IRR would be a benefit. This boils down to whether the employee wants the shares used for Roth or NUA purposes, they cannot have both.
Permalink Submitted by Denise Dawson on Fri, 2016-04-08 14:06
That makes sense. Does the inplan conversion prohibit doing NUA on the taxable shares once you separate service and then do a lump sum?
Permalink Submitted by Alan - IRA critic on Fri, 2016-04-08 17:21
If there are employer shares that were NOT part of the IRR and remained in the pre tax 401k account, those shares could be used for NUA after separation because the separation would be a new triggering event for NUA purposes. That would erase the effect of the IRR distribution, and allow a qualified LSD to take place after separation.