ESOP NUA LSD and Roth 401(k)

Submitted by Bruce Sable on Wed, 2017-10-25 17:23

I am 70 1/2 this year and have been retired for 10 years. I understand that I have to take my first RMD no later than 1 April 2018 with another RMD by 31 December 2018. My 401(k) has a large NUA from my ESOP with a stock cost basis of only 7%. The NUA has a greater value than the required 2 RMD’s. I understand that performing an NUA transfer will be treated as meeting the RMD requirements. In the first quarter of 2018 I would like to perform a Lump Sum Distribution as follows:
1) Transfer all of ESOP equivalent company stock shares into a taxable brokerage account.
2) Transfer my 401(k) Before Tax value into my Traditional IRA.
3) Transfer my 401(k) After Tax value into my existing qualified Roth IRA.
4) Transfer my Roth 401(k) into my qualified Roth IRA. A complicating factor is that the Roth 401(k) was established in 2015 by an “In Plan” transfer of my pre-1987 401(k) contributions into a Roth 401(k). This was treated as a non-taxable event by the plan administrator and I am assuming that it will not be treated as a disqualifying distribution in terms of NUA eligibility. Since Roth 401(k)’s require RMD’s, and this is not yet a 5 year qualified plan I would assume that I would owe tax on any earnings included in the RMD. My question is: Would the required Roth 401(k) RMD’s also be covered by this same NUA distribution blanket that covers the regular 401(k) RMD’s? Even so, I’m not sure how to handle the tax due on the non-qualified Roth 401(k) earnings and I certainly don’t want the plan administrator to have any excess contributions transferred to my qualified Roth IRA.



Submitted by Alan - IRA critic on Wed, 2017-10-25 20:35

Unfortunately, QA 9 of Notice 2013-74 (IRRs) indicates that an IRR is treated as a distribution for purposes of the NUA qualified LSD requirements. The IRR would be an “intervening distribution” that would disqualify a later year LSD unless there was a new triggering event. The only possible new triggering event would be your death. Here is QA 9:

Q-9.  Is an in-plan Roth rollover treated as a distribution for purposes of determining eligibility for the special tax rules on net unrealized appreciation (“NUA”) in employer securities paid in the form of a lump sum distribution under § 402(e)(4)(B)?   A-9.  Yes.  An in-plan Roth rollover is treated as a distribution for purposes of determining eligibility for the special tax rules on NUA, whether the rollover is made by an in-plan Roth direct rollover or by an in-plan Roth 60-day rollover.  See also Q&A-7 of Notice 2010-84.

Submitted by Alan - IRA critic on Wed, 2017-10-25 20:48

With respect to your question, note that qualified plan RMD rules allow the RMD for the pre tax account and the designated Roth account to be “aggregated”, although some plans have adopted rules to disallow aggregation. And even if you could aggregate and take the full RMD from the pre tax balance, that would increase your tax bill for the RMD, but would preserve your Roth assets and reduce future RMDs since the pre tax 401k balance would be reduced before the direct rollover to your TIRA. If the Roth 401k is tapped for RMDs, the pro rated amount of earnings included would be taxable. To avoid that you would have had to roll the Roth 401k over to a Roth IRA prior to the year you reached 70.5. Of course, once the Roth 401k rollover is made to a qualified Roth IRA, all Roth IRA distributions will be tax free and there will be no RMDs. You might check with the plan administrator to find out if your plan RMDs can be aggregated per IRS Reg 1.401(9)-(8) Q 2, that is if you want to aggregate the RMD because that would affect your taxable RMD income in 2018 and also from your TIRA in the future.

Submitted by Bruce Sable on Sun, 2017-10-29 18:59

Thanks for the insight, Alan.

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