Possible NUA Situation

Submitted by Mhotchkiss on Wed, 2023-06-28 18:53

Client has 401k totals as follows- ESOP Company funded in company stock = 150k, basis 50k; Company contributions in Common Stock = 20k, basis 15k; After-tax account in company stock = 500k, basis 200k. When considering a lumpsum distribution, rollover to IRA for future conversions and taking into account the need for current income from these funds, in general I’m thinking taking the ESOP as NUA to use that for income for next few years; rolling the company contribution stock to TIRA as cash and then looking at taking some of the AT Basis as cash to use to pay for conversions and rolling the rest as cash to Roth IRA, with appreciation amount to TIRA as cash. – Am I missing anything?



Submitted by Alan - IRA critic on Wed, 2023-06-28 21:31

Is client retired for good?  Current age?  Is the basis referred to in the “after tax” account NUA cost basis or the amount of accumulated after tax contributions made?  Plans can vary in how they apply after tax contributions to NUA, as some apply it to the cost basis and others may allow the participant to instead use the after tax total in the plan for a tax free distribution to a Roth IRA.  In general, the NUA cost basis % is rather high for NUA to beneficial.Does client already have a Roth IRA and knows the amounts of contribution or conversion basis for the current Roth? 

Submitted by [email protected] on Thu, 2023-06-29 12:53

Client is fully retired, A62.  Basis is after-tax is the stock share price at time of deposit into the account, and equals the accumulated after tax contributions since it has all been put in company stock.  Client does not currently have a Roth IRA.

Submitted by Alan - IRA critic on Fri, 2023-06-30 16:03

  • OK – just to be sure, disregarding the NUA cost basis of employer shares based on the gross share price when purchased in the plan, did client actually make 200k of after tax contributions to the plan (totally different than NUA cost basis)?
  • If so, and you want to use just the ESOP portion for NUA paying tax on the 50k cost basis, that would leave 100k of shares in taxable on which LTCG rates would apply to the NUA when sold, with subquent gains per share taxed at ST rates for the first year. Thereafter, the entire value would be LT.
  • Rest of the co shares and plan would be distributed as a required LSD to qualify the ESOP portion for NUA. For simplicity, assuming that 200k of after tax contributions were made by client, a direct rollover of the plan after tax balance (200k) to a Roth IRA, and the rest to a TIRA, would be non taxable. Client could then take up to 200k treated as Roth conversion basis tax and penalty free anytime needed for living expenses. Amounts withdrawn over 200k from the Roth would be taxable as gains until 2028 when the Roth would be qualified. Form 8606 would be required for all distributions until 2028 to show conversion basis on line 24, but no taxes due. This way, the 200k could be earning tax free until actual funds are needed and distributed.
  • Not clear if the 20k of company contributions have any after tax basis. The 15k shown may be NUA cost basis instead of after tax contributions, therefore ignored since these shares would not be used for NUA. However, if client actually made 215k of after tax contributions, then 215k could be rolled to Roth tax free instead of just 200k. 
  • This would also simplify the LSD execution since distribution to taxable would be limited to the ESOP NUA shares. The rest would be a split direct rollover to TIRA/Roth IRAs.
  • As always, company plan accounting statements, distribution options, and understanding of the rollover request is critical for multi location LSDs and all should be confirmed prior to the LSD request.

Submitted by [email protected] on Fri, 2023-06-30 22:12

Thanks much.  To your first question above, yes, client made only after-tax contributions to the Separate After-Tax account.  First I’ve ever seen that, without doing “mega backdoor” Roth concurrently.Understand all, appreciate the help.-m

Submitted by [email protected] on Fri, 2023-06-30 22:13

Thanks much.  To your first question above, yes, client made only after-tax contributions to the Separate After-Tax account.  First I’ve ever seen that, without doing “mega backdoor” Roth concurrently.Understand all, appreciate the help.-m

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