In-service distributions & NUA

Submitted by Kendra Johnson on Thu, 2022-08-18 19:04

Would doing an in-service distribution now from a 401k screw anything up later if we are trying to do an NUA strategy when the individual actually retires? Adding some more complexity the 401(k) does have a chunk of nontaxable Roth and post-tax balances and along with pre-tax balances?



Submitted by Alan - IRA critic on Thu, 2022-08-18 20:32

  • Doing an in service distribution will not impair NUA potential because separation from service will be the triggering event for a qualified LSD needed to utilize NUA. 
  • With the 401k containing 3 buckets, the best options depend on plan accounting, and how they allow the post tax non Roth bucket to be applied. It could either be used to reduce the taxable cost basis for an NUA stock distribution, or it could instead be used for a non taxable Roth rollover, which could be directly rolled to a Roth IRA along with the Roth 401k balance. The latter is probably the better choice IF the plan allows it and does not require it to be applied to the taxable cost basis. Any appreciated employer shares in the Roth 401k sub account should not be used for NUA. Tax free is preferable to cap gains.

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