NUA and Step-up in Basis

Submitted by RonC on Tue, 2022-06-07 22:45

I dissolved my 401k with a LSD.
Lets say I had 100k in stk with a cost basis of 10k, so 90k is NUA. I paid ordinary income tax on CB.
Lets say when I die, the stock is worth 200k. Am I right saying my beneficiaries will need to pay LTCG tax on 190k ? Lets say they hold it another year (after death) and the value goes up to 300k .. will they still only owe LTCG on the 190k ? Will they get a step-up in basis for growth after-death ?



Submitted by Alan - IRA critic on Tue, 2022-06-07 23:32

If they sell when the value is 200k, they will only owe LTCG tax on the NUA (90k). If they wait and sell after the shares are worth 300k, they will owe LTCG tax on 190k. The basis step up is limited to your 10k cost basis plus gains after distribution but prior to your death (100k). Gains after your death (100k) do not receive a step up.

Submitted by RonC on Wed, 2022-06-08 12:35

Thank you.. so, while still alive, if I sell some, will that spoil the pot (so to speak) or would the per-share price be used for the purpose of calculating step-up? Obviously, it’s only beneficial if stock prices go up. If they went down, assume 50k at death, will beneficiaries get a step-down and pay LTCG on 40k ? Thanks, Ron

Submitted by Alan - IRA critic on Wed, 2022-06-08 15:12

  • While alive, you would have to determine the cost basis, NUA, and additional gain per share. You should NOT reinvest dividends in more shares, since reinvested shares overly complicate basis tracking and aggravate any diversification issues. In the first year, any additional gains would be taxed at the higher STCG rate while the NUA would be taxed at the LT rate. Your cost basis per share would be the 10k converted to a per share amount. Selling some shares will just reduce the number remaining that would have NUA per share. If the price drops, NUA per share is erased (but restored if the shares rise again), and your LTCG would be less due to a lower NUA per share. Of course, this is all determined on the day of your sale.
  • Same for beneficiaries with respect to NUA they inherit, which does NOT get a basis adjustment.  Additional gains above the NUA they inherit plus all gains occurring after they inherit are taxed at the LTCG rate as well as the NUA per share they inherit. Their cost basis per share will therefore be the value per share at your death less the NUA per share at your death. 

Submitted by RonC on Thu, 2022-06-09 01:01

Thanks .. I am having trouble grasping the last statement. In my optomistic example where stock is worth 200k at death, heirs will pay LTCG on 90k but their cost basis will be 110k ? Does this mean they’d have to pay ordinary income tax on this CB as I had to for the 10k to start the NUA during LSD ? I don’t reinvest div. Since they’re taxable when paid regardless, I take as Qual Div. I ask about the NUA because I’d like to know what is best to leave heirs so I know what to spend down 1st. Obviously the Roth has no tax but the “brokerage” has the potential to be more a bargain for them than it is for me because of the step-up. Thanks, Ron

Submitted by Alan - IRA critic on Thu, 2022-06-09 02:27

No, they do not pay ordinary income tax, only LTCGs on the amount of NUA. The rest of the value gets a basis step up to 110,000, which was the account value excluding the NUA. 

Submitted by RonC on Thu, 2022-06-09 14:01

Ok, thank you. 

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