NUA from My Deceased Stepdad’s 401(k) plan – now owned by my Mom

Submitted by matthew grandonico on Mon, 2022-10-17 14:56

Stepdad passed away – my Mom is beneficiary. $161k in total value of Stock in 401(k) Plan. Trying to consolidate accounts to try to make life easier. If I distribute the $161k in stock that has a cost basis of $95k is my Mom eligible for 1 time exemption?

Raytheon is reporting Total amount of $161k to IRS as distribution.

Thank you!



Submitted by Alan - IRA critic on Mon, 2022-10-17 15:29

She would be eligible for NUA treatment as the beneficiary, but the high cost basis is unattractive unless she needs a large current distribution to pay expenses. Her decision is also affected by RMDs. What was the date of death, and ages of stepdad and mother as of year end of the date of death year? Also, were they married at the time of death?

Submitted by matthew grandonico on Mon, 2022-10-17 16:33

1. She does not need distribution to pay expenses2. Stepdad passed away 1/2021.   83 and 823. Yes they were marriedCost basis prior to distribution was $95k our of total cost basis reported by Raytheon on total distribution fo $161(other portion of 401(k) plan was rolled over to existing IRA)

Submitted by Alan - IRA critic on Mon, 2022-10-17 16:54

Their last year to file jointly was 2021. For 2022 and beyond Mom will be filing as single and her marginal rates will therefore be higher. With an NUA distribution she will have to report 95k of ordinary income. It sounds like she may have already taken the distribution of shares as well as the other assets being rolled over to her owned IRA. The first distribution from the plan had to include her 2022 beneficiary RMD from the 401k. Sorry, more questions as there are many variables at work here- what amounts have already been distributed from the  plan since his death and when?  SInce he passed so early in 2021, if he was retired he probably had not taken his 2021 RMD, and Mom became responsible for that by inheriting the plan. So did she take a distribution in 2021 to complete his RMD?  If so, that’s an intervening distribution and NUA is disqualified  unless she also distributed the entire balance in 2021. 

Submitted by matthew grandonico on Mon, 2022-10-17 18:03

1. Regular RMD distributions from account since 70 1/22. She did not distribute entire balance in 2021 – she just became account holder as she was beneficiary and I am POA3. Account sat there until last month when I rolled over the Mutual fund portion of 401k plan to her IRA and the stock portion— depending on outcome of research in stock to merrill lynch

Submitted by Alan - IRA critic on Mon, 2022-10-17 19:47

  • If the 2021 and 2022 beneficiary RMDs were not distributed to her before the direct rollover to her IRA, that will result in an excess IRA contribution to the extent that step father’s 2021 RMD was not taken and mother’s 2022 beneficiary RMD. The rollover you did last month will satisfy those RMDs, but then she must advise her IRA custodian the amount of RMDs that were rolled over, and ask that be treated as excess 2022 IRA contributions and removed. 
  • Due to the rollover last month that included RMDs, the option of using employer share distributions to cover these RMDs was eliminated, and that contributes along with the high cost basis to erase the benefit of NUA. In other words, she would have both his 2021 RMD, her 2022 beneficiary RMD along with the 95k of taxable cost basis as 2022 taxable income, in a year she is filing single status. Therefore, it appears that a direct rollover of the employer shares to her IRA would be her best option at this point. She could then sell the employer shares, or at least sell enough of them to avoid having too much in a single holding. Selling within her IRA account would not be a taxable distribution.
  • It’s rare that an employer plan administrator, and Raytheon likely uses a very professional plan administrator, would not distribute the 2021 and 2022 RMDs directly to Mother before doing a direct rollover. Are you sure that wasn’t done?

Submitted by matthew grandonico on Mon, 2022-10-24 13:46

Yes – all RMD’s were taken out in 2021 but no RMD was done from account in 2022.

Submitted by Alan - IRA critic on Mon, 2022-10-24 16:05

  • If 2021 RMD  was completed, it either was done by stepfather before passing, even though he passed in January. Or if his death was not reported to the plan, the plan might have distributed the 2021 RMD payable to him automatically after his death. Such a distribution would have constituted an “intervening distribution” which would disqualify the use of NUA by Mom. 
  • Depending on the details of the 2021 RMD distribution that you indicated was completed as indicated above, NUA could still be possible this year, but the partial rollover done last month would include the 2022 beneficiary RMD, and this RMD was not eligible for rollover. That creates an excess IRA contribution. As indicated earlier, the 2022 beneficiary RMD should have been distributed before any rollover to prevent the rollover of RMD funds. 
  • You mentioned that Raytheon would be reporting 161k (employer stock value) as a distribution. Are these shares still in the plan? If so, and the plan distributed the 2021 RMD in 2021 after his death, that eliminates NUA and the shares should then be directly rolled over to an IRA along with the other plan assets.
  • Even if the 2021 distribution was made before his death, and NUA is therefore still possible, since the cost basis is quite high and she does not need these funds anytime soon, rollover of the shares to the IRA is still the best option. Finally, the amount of NUA per share does NOT get a basis adjustment upon her death.

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