Tax payment on NUA basis
Looking to complete a NUA scenario for a client. They have $236k in basis (401k) with stock value of $1.8m. When we initiate the NUA, the basis will be taxed at ordinary income. My question is, can we withhold from that to pay the taxes? If not, what options do we have to pay the taxes? Do they have to be paid from outside of the NUA? Are they required to be paid right away during the process or can they pay at the next QEP date (Q4 2025 to be paid by Jan. 15 2026). Thank you
Permalink Submitted by Alan - IRA critic on Fri, 2024-12-27 16:46
Withholding from the shares would require selling the shares before the LSD and that would reduce the number of shares that could be utilized for NUA. Rather, because NUA requires a qualified LSD of the entire balance in the plan the withholding target can be met by electing a % (greater than the fed mandatory 20%) for the remainder of the plan distribution. Any withholding is treated as paid equally throughout the year as opposed to quarterly estimates which are credited when paid.
Because withholding from a plan distribution also makes the withheld amount taxable, if the client has the cash available, they could do a 60 day rollover of the withheld amount using that cash. That would eliminate the taxation of the withheld amount.
If the client would rather pay a large estimate in Jan, 2026 rather than withhold, if the LSD was done in the final quarter of 2025, they would also have to complete Form 2210 AI which is a form that reports the quarter in which income is realized, so the IRS knows that the LSD was done in the final quarter. If the estimate is sufficient, this form will eliminate any penalty for the first 3 quarters.