distribution of roth/ESOP/after tax/other from 401k

Submitted by abraham boznick on Sun, 2018-02-11 07:32

I have 401(k) plan. I am over 60 and plan to retire and convert my 401(k). If I have Roth IRA, after tax, ESOP, and other stocks in my 401(k). To keep things simple — should I establish 4 accounts for on retirement for distribution: 1) Roth IRA 2) After Tax (which I believe would be ROTH as well) 3) NUA for ESOP, and 4) regular brokerage account for other stocks held in 401 (k)?



Submitted by Alan - IRA critic on Sun, 2018-02-11 17:51

  • You will probably have pre tax plan assets other than ESOP shares going to a TIRA, so you would need a TIRA, Roth IRA and taxable brokerage account. You could use your existing accounts if you already have them. No need to separate the NUA shares in their own brokerage account.
  • The distribution decision will be anything but simple if you plan to use NUA simultaneously with your after tax contributions. Plan bookeeping will determine if you can direct your full after tax balance to your Roth IRA (non taxable Roth rollover) or whether the plan will require that this balance be used to reduce your taxable cost basis on the NUA shares, or whether you could split the allocation as desired. Be very careful because if taxable amounts get send to your Roth IRA, you can no longer recharcterize all or part of that rollover and would be stuck with the tax bill in addition to the cost basis on the NUA shares.
  • Therefore, hopefully the plan has a clear distribution form for you to fill out. After you do that, you may want to fax a copy to the plan administrator and then call them to discuss any questions or gray areas. 

Submitted by abraham boznick on Sun, 2018-02-11 19:20

thank you for your thorough answer.1) Since NUA does not get stepped up basis on death but stocks in regular brokerage account do — then if I distribute NUA into the regular brokerage account — who would be able to keep track of NUA shares (and divident distribution, etc) vs regular shares for inheritance purposes?2) If I understand correcly – -I should not mix regular ROTH 401(k) and after tax 401(k). And should direct (if I can) my plan to send ROTH 401(k) and after tax 401(k) into separate ROTH accounts. Also it appears that it is not a good idea to mix ROTH 401(k) and after tax distributions with an existing ROTH IRA accounts. 

Submitted by Alan - IRA critic on Sun, 2018-02-11 20:51

  • You didn’t mention Roth 401k earlier, but there is no reason not to do the direct rollover of the Roth 401k balance into the same Roth IRA that receives the after tax non Roth rollover. All your Roth IRAs are considered as a combined single account for distribution taxation. Since you are over 59.5, if you have had a Roth IRA for at least 5 years, your Roth IRA is qualified and ALL rollovers into it are also qualified. In that situation you will not need to track Roth IRA basis since all distributions will be tax free.
  • The only reason to consider a separate Roth IRA to receive both Roth 401k and after tax rollovers involves creditor protection issues if you live in a state that does not provide decent IRA creditor protection.
  • With respect to NUA shares, assuming that the cost basis is low enough to warrant use of NUA (typically 25% or less), and if you do not sell the shares for diversification purposes, you will need to keep track of your cost basis per share and your NUA per share and provide this info to the brokerage. Not sure how well brokers track both amounts for 1099B reporting when you sell, so all such forms need to be checked, including after death the step up except for the NUA portion of each share. Again, this is needed whether the shares are in a separate account or not, so no benefit of using a separate brokerage account just for NUA shares.

Submitted by abraham boznick on Sun, 2018-02-11 21:03

tahnk you for an excellent answer and doing so much good for the community as a whole.

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