Question on NUA Tax Treatment
I’m 58 and have been retired since June ’06. In May ’07 I closed out my company plan via a lump-sum distribution (LSD). Some of the distribution went directly to an IRA. The rest came to me as in-kind shares of my company stock. Some of the in-kind stock (I’ll call it “Group A”) had been purchased in the plan with tax-paid money. I sold all of this “Group A” stock immediately after the LSD and diversified the proceeds into other investments. There was no tax due on the cost basis (was paid in the past) so I mailed an estimated tax payment to the IRS in June ’07 for the tax on the appreciation (15% LTCG rate on most of the appreciation and ordinary income tax rate on the small amount of appreciation between the LSD and the sale date). The rest of the in-kind stock (I’ll call it “Group B”) that I received in the LSD was purchased with tax-deferred money. I paid estimated tax on the cost basis after the LSD. Now I would like to sell some of this stock. However, the company plan administrator had advised me that selling this “Group B” stock within the first 365 days after the LSD would require my paying the ordinary-income-tax rate on ALL of the appreciation (NUA). I don’t think this is correct, but the plan administrator was adamant. I would like your opinion on the tax due if I sell this stock now. Thanks in advance for your response.
Permalink Submitted by Alan Spross on Wed, 2007-08-29 04:24
The rate is the LT cap gain on the sale of NUA shares from Day 1, however any additional gains above the value on date of distribution will be taxed at ordinary income rates until held for over 1 year. I don’t understand why the plan administrator feels a different rule would apply to the two different groups.
While a different matter, I would be more concerned about the plan accounting that isolates your after tax contributions to a single group of shares rather than spreading it equally. If they do, I agree that the shares purchased with after tax money would have no taxable cost basis if your dollar after taxa basis was divided by the value per share to determine the # of shares in Group A. It will be interesting to see how the 1099R (or R’s) looks in this case.
Permalink Submitted by Dan Gibbs on Wed, 2007-08-29 06:22
Thanks Alan for your response. When I completed the LSD, I had a blank 1099R in hand. The admin read off the numbers that she said would appear on the 1099R. Line 2a (taxable amount) showed only the cost basis for the “Group B” stock in my example (good!). The Statement of Account Distribution that I later received in the mail confirmed this figure.
As I mentioned in my original post, at LSD commencement, all of the tax-paid money in my account followed the in-kind stock to me. I had heard (I believe from this forum) that tax-paid money in a company plan must be appropriated to ALL of the assets in the plan and not just in-kind stock for NUA. The admin said this would be true if I was still an employee taking a partial distribution. However, as a retiree taking an LSD, ALL of the tax-paid money CAN (and apparently did) follow the in-kind stock. Having said that, it still will be comforting to receive a “correct” 1099R in the mail next February! Thanks again.