can you do an NUA recharacterization? (or reverse it the next year?)

Submitted by ben johnson on Mon, 2019-06-10 21:10

Long story much shorter my mother in law retired in 2017. She was forced to take her first RMD due to her being 70.5 that same year. We had talked about doing an NUA and rollover as she had some highly appreciated company stock (actually 2 stocks as the company had a spin off many years ago) with a low basis in her plan and did not get around to doing it until 2018…

…when her 1099R showed up in 2019 she sent it along with some paperwork to her accountant showing that she did an NUA and rollover. He contacted her and let her know that the numbers did not add up and was showing about $270k in additional income (the entire stock amount) rather than close to $100k.

After several calls to the old custodian of her retirement plan they informed us that once one takes any distributions from her plan in a year PRIOR to the NUA the basis changes in the stock (there are a few more details here that I can get if it helps). So after she filed an extension with her accountant we have done some calling around and research and not found much information that helps. Here are the 2 key questions for the experts at Slott:

1. Can one “undo” an NUA and rollover the next calendar year (even if it is fully into the IRA rollover account that the rest of the 401k was transferred to)?

2. Are there any other options or does she need to eat what looks to be a significant tax bill?

Thank you and if there is more nuanced tax advice needed we can speak directly with an expert there at Ed Slott & Co.



Submitted by Alan - IRA critic on Mon, 2019-06-10 23:48

  • If she retired in 2017, her RBD was 4/1/2018 so there should not have been a required distribution in 2017, despite 2017 being an RMD distribution year. When there is NUA potential due to low cost basis, the taxable cost basis for two years of RMDs could have been applied. The shares would have had to be distributed by 4/1/2018 and that value (cost basis plus NUA) would have been enough to satisfy both the 2017 and 2018 RMD. The rest of the LSD would have had to be distributed by 12/31/2018.
  • Instead it sounds like a distribution (RMD or otherwise) was taken in 2017 after the date of retirement. That would make that distribution an “intervening distribution” that destroyed future NUA potential until the participant passed. The plan would then have issued a 2018 1099R for the distributed amount without showing any NUA in box 6. Is that where this sits now or was the timing of transactions different than I assumed?  If not different there is no way to fix it since the 60 day rollover option for the distribution of shares ended long ago. 

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