401k rollover of tax-paid balance for company stock
I want to rollover my 401k. It consists of company stock (to be moved in kind) and investments (to be sold and moved in dollars), both pre-tax and after-tax. I’d like to direct it as follows:
1. Roth: All after-tax amounts (both company stock and investments)
2. Traditional (non-Roth) IRA: Before-tax investments and before-tax high-cost company stock
3. Brokerage for NUA treatment: Before-tax low-cost company stock.
I figure the taxes on this will be capital gains tax on the cost basis of the NUA stock moved into the brokerage at the time of the transaction. At the time of sale, I would owe capital gains tax between the cost basis and the market price on the NUA stock. Traditional IRA is taxable at ordinary rates when withdrawn and the amount sent to the roth (and its earnings) will not be taxed again. Can this be done? Judy
Permalink Submitted by Alan - IRA critic on Fri, 2021-12-24 18:37
This is allowable under IRS rules, but the plan may not offer this degree of flexibility. It’s a complex distribution request so you will have to make it very clear to the plan to avoid an error. You should call the plan first and see if they will allow you to apply the after tax contributions entirely to a Roth IRA direct rollover, and if they instead apply some of it to the taxable cost basis of the NUA shares, you would end up with a smaller Roth rollover and a lower current ordinary tax on the NUA share cost basis. Many plans also will not allow to split up the NUA distribution into tax lots and instead apply an average cost. Your plan is well thought out – if the plan document or operating procedures allow this much flexibility.
Your taxes due for the LSD year under your distribution instructions would not include cap gains on the NUA unless you sell those NUA shares later in the same year. But you will owe ordinary income tax on the cost basis and that will show in Box 2a of the 1099R issued for the share distribution. You should get 3 separately coded 1099R forms for this LSD the following January.