NUA in 401k
If a spouse has employer stock in the 401k and passes away, and the inheriting spouse in under 55, and they exercise NUA as a triggering event does the NUA distribution of in kind securities avoid the 10% penalty?
Secondly in cases with NUA where a 10% penalty does apply, is it true that its only on the basis of the stock and not the fair market value?
Permalink Submitted by Alan - IRA critic on Fri, 2021-07-16 14:08
Since the 401k is inherited, the LSD for NUA purposes to the beneficiary will be coded as a “death distribution” on the 1099R – Code 4, therefore no penalty. In other cases when the penalty would apply, it only applies to the taxable cost basis amount shown in Box 2a. There is also no mandatory withholding on the LSD since there is a withholding exemption for employer shares.
Permalink Submitted by David Mitchell on Fri, 2021-07-16 15:30
Thank you . Can you explain what LSD is an acronym for?
Permalink Submitted by Alan - IRA critic on Fri, 2021-07-16 17:40
Lump Sum Distribution – a qualified LSD is a requirement to utilize NUA. All assets of the plan or similar plans containing the employer shares (401k or ESOP for example) must be distributed within a single calendar year to qualify. A defined benefit pension plan is not considered to be a “similar plan” to a 401k, but an ESOP is. Assets other than employer shares are typically moved via a direct rollover to an inherited IRA (because surviving spouse is under 59.5) or if there is no need to tap these other funds prior to 59.5, to an owned IRA. Of course, the surviving spouse should get a cost basis quote on the employer shares to make sure the cost basis is low enough to warrant using NUA. Surviving spouse is not required to apply NUA to all the shares. She could choose some of the shares and sell the others within the plan or roll them to an IRA and sell them there. Diversification is always the top issue to control risk. She should not maintain a high portion of her assets in the shares of a single company.