NUA

Submitted by Spencer Frank on Tue, 2017-10-10 14:19

I have a client who is 69 years old who has an old 401k with $3.5 million in ITW stock with a cost basis of $1 million and $100k in after tax money in a mutual fund. We are discussing the pros/cons of NUA. An issue is paying the tax on the cost basis. In all likelihood if he does NUA, he will never sell the stock and it will get a step up in basis when he passes. Can he do a partial NUA to minimize the tax on cost basis? This would also allow him to diversify the balance when rolled to his IRA. Any other ideas? Thank you!



Submitted by Alan - IRA critic on Tue, 2017-10-10 17:02

  • Yes, he could request distribution of only a portion of the stock. If the cost basis is not applied as an average of all shares and certain lots have a lower cost basis than others, he could request a distribution of only the lower cost basis shares, and sell or roll over the rest. This would also allow critical diversification as it is very risky to hold too much in a single issue, especially for many years. 
  • Note that the NUA value per share does NOT get a basis adjustment at death, and the beneficiary would have to use the original cost basis when reporting sales. Additional gains after distribution (amounts in excess of the NUA) DO receive the basis adjustment.
  • Be sure client understands how the plan accounts for the 100k in after tax contributions. In most plans, it will be applied to reduce the cost basis for the distributed NUA shares. However, if there are other options, client would probably benefit by having the 100k directly rolled to a Roth IRA using a split rollover per Notice 2014-54. The NUA cost basis would not be reduced by the after tax contributions. Partial mix and match amounts might also be an option depending on how much NUA stock and current tax bill is desirable.

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