Hi, I am retired and moving my company stocks from 401k saving to outside brokerage account without any cash pay off. The administrator told me it’s mandatory withholding IRS 20% tax from my new NUA account and based on the total cost base “X”.
my question; (1) what is total distribution income will show up on my 1099R on line 1 & 2a? Is X+0.2X?
(2) Can I request non withholding and pay tax through my own baking account? Thanks
The administrator is incorrect, as amounts distributed as NUA in employer stock shares are exempt from withholding per Sec 3405(e)(8) of the tax code copied below.
“No amount shall be required to be withheld under this section in the case of any designated distribution which consists only of securities of the employer corporation and cash (not in excess of $200) in lieu of financial shares. For purposes of this paragraph, the term “securities of the employer corporation” has the meaning given such term by section 402(e)(4)(E).”
Your 1099R should show the gross value of the shares in Box 1, the currently taxable cost basis in Box 2a and the amount of NUA in Box 6. For the taxable income in Box 2a which is added to your other taxable income, you will need to withhold from some other retirement plan or pension distribution or pay quarterly estimates.
Usually NUA is not beneficial if the cost basis that will show in 2a is over 30% of the total value in Box 1. If you decide that NUA is not beneficial, you can avoid the current taxes by rolling over the shares to an IRA within 60 days of the distribution, or you can roll over some of those shares and keep the rest.
The administrator of the 401k is incorrect, as there is no withholding required on the distribution of NUA shares per Sec 3405(e)(8) of the tax code. This section is copied below:
“No amount shall be required to be withheld under this section in the case of any designated distribution which consists only of securities of the employer corporation and cash (not in excess of $200) in lieu of financial shares. For purposes of this paragraph, the term “securities of the employer corporation” has the meaning given such term by section 402(e)(4)(E).”
You will still be taxed on the amount in Box 2a of the 1099R reporting the distribution. To avoid an underpayment penalty, you might withhold from other income sources, or pay quarterly estimates. Box 1 of the 1099R reporting the share distribution will show the gross value of the shares, 2a will show your taxable cost basis, and Box 6 will show the amount of NUA in those shares. You may owe the 10% penalty on this Box 2a income unless you are 59.5, disabled, or separated from service at 55 or later.
I assume you verified with the plan that you were eligible for a qualified lump sum distribution of NUA shares before requesting the distribution. NUA is not usually beneficial if the cost basis is over 30% of the total value of the shares.
There is no mandatory withholding for the distribution of employer shares for NUA purposes per Sec 3405(e)(8) of the tax code. Taxes on the cost basis in Box 2a of the 1099R will have to be paid from other income sources or quarterly estimates.
Permalink Submitted by Jimbon on Tue, 2024-04-16 19:56
typo: banking account