Roth 401(k) and NUA

Submitted by Steven Halko on Wed, 2022-07-06 18:44

Questions after reading this month’s piece on Roth 401(k) to Roth IRA Rollovers.
What about employer stock sitting in the Roth 401(k) plan? NUA must not come into play, correct?
Can those shares be automatically distributed tax-free to a brokerage account or would the shares need to be rolled over to the Roth IRA first?



Submitted by Alan - IRA critic on Wed, 2022-07-06 21:33

  • If the Roth 401k was qualified, the NUA becomes a non issue since the entire distribution would be tax free. NUA is always voluntary and would never be elected in this situation. Basis for the shares in the taxable account would be their fair market value at the time of distribution.
  • However, if the Roth 401k was not yet qualified and presumably it contains other investments in addition to the employer shares and the non employer balance would be directly rolled to a Roth IRA, in the case of a qualified LSD the participant has the option provided by Notice 2014-54, which allows the participant to determine which portions of the distribution will be directed to the Roth IRA rollover or the employer shares.  The employer shares used for NUA may have a reduced taxable cost basis as investment in the contract (Roth 401k contributions) as well as LT cap gain. 
  • Accordingly, the accounting and determination of the destination for the employer shares becomes extremely complex. In order to make the best decision the participant would have to know the amounts of the investment in the contract (Roth 401k basis), the amount of gain, and separately the cost basis for the employer shares in the Roth 401k and the NUA per share which adds up to the total value of the shares. It appears that the participant will therefore have to consider a trade off between increasing basis in the Roth IRA or reducing the taxable cost basis for NUA shares, and then hoping that the 1099R for the distribution of NUA shares properly reflects that choice.
  • I have not seen a clear example of how this would work. See QA 10 of IRS Reg 1.401A-1 which addresses distributions of employer shares from a Roth 401k and  TD 9769 which applies Notice 2014-54 to Roth 401k accounts. Again, there are no specific examples I have seen that combine this guidance. Due to the risk of confusion and plan administrator misinterpretation are high.
  • As a participant I would attempt to avoid employer shares being contributed to the Roth 401k. Any company matches go to the pre tax 401k, but if the participant actually purchases employer shares in a brokerage window many plans will allocate those shares in the same proportion to the pre tax and Roth accounts.


Add new comment

Log in or register to post comments