The NUA Rule for Qualified Plan Rollovers
A person who is 70.5 this year, decides to take advantage of the NUA rule with regard to his old 401K Plan at work. He has both company stock and other funds in the plan. He plans to roll the non-company-stock balances into a rollover IRA. With regard to the company stock, for which will be obtaining the stock certificate and depositing it into a non qualified brokerage account, he understands that he will have to pay tax at ordinary income rates on the cost basis of the stock. He can then decide on the liquidation of the stock at a later date based upon his needs and asset allocation suggestions.
The question is whether he can treat the cost basis of the stock, on which he is paying ordinary income tax this year, as the Required Minimum Distribution for this year.
Permalink Submitted by Alan Spross on Sat, 2007-09-29 19:05
Yes, any part of a distribution counts toward the RMD regardless of it’s tax treatment.
One immediate concern in his situation is whether he is still eligible for NUA due to possible intervening distributions from the plan since his last triggering event, which would either be separation or reaching 59.5. If he has not taken intervening distributions, he would be eligible, but if he takes any RMDs from the 401k plan prior to the year of the LSD, the RMDs themselves become intervening distributions.
If the LSD is to be done this year, the analysis and distribution should probably start now. Waiting until near year end raises the risk that the entire LSD will not get fully completed by year end. Any amount distributed from the plan this year does count toward the RMD including both the cost basis and the NUA value, but that RMD must be satisfied before any IRA transfer. Therefore, the IRA transfer would be completed last.
If for some reason the LSD is not completed this year and no RMD is taken, he might still be eligible for NUA next year, which includes his RBD. He would then need to take two RMDs in some form next year before doing the IRA transfer.
Permalink Submitted by [email protected] on Mon, 2007-10-01 15:01
Thank you very much.
He has not taken any distributions from his 401K plan since he retired from the company. The work has started now so that it is completed before the end of the year. The client would like to do the transfer this year so that he takes advantage of one RMD this year and does not have to take two RMD’s next year.
The Plan Administrator is insisting on doing the RMD before allowing any transfers. Could the stock issue be considered the RMD for their purposes? Also, what value would be considered for RMD purposes? Is it the cost basis or the entire market value on the date of transfer?
Appreciate your input.
Permalink Submitted by Alan Spross on Tue, 2007-10-02 00:23
Sounds like the administrator does not realize that the RMD is satisfied by the distribution of NUA shares and wants to do a separate distribution. That would be unnecessary and costly.
Typically, the cost basis alone is enough to satisfy the RMD, but the NUA also counts if needed since both are distributed from the plan and will show on the 1099R. The amount in Box 1 less any amount rolled over to an IRA is credited against the RMD requirement.
Here is a partial paste of the IRS Regs on this issue:
A–9. (a) General rule. Except as
provided in paragraph (b), all amounts
distributed from an individual account
are distributions that are taken into
account in determining whether section
401(a)(9) is satisfied, regardless of
whether the amount is includible in
income. Thus, for example, amounts
that are excluded from income as
recovery of investment in the contract
under section 72 are taken into account
for purposes of determining whether
section 401(a)(9) is satisfied for a
distribution calendar year. Similarly,
amounts excluded from income as net
unrealized appreciation on employer
securities also are amounts distributed
for purposes of determining if section
401(a)(9) is satisfied.
>>>>>> >>>>>>>>>[/b]
Permalink Submitted by BruceM on Tue, 2007-10-02 17:08
Alan
Would you mind expanding a bit on ‘intervening distributions’? Lets say a worker separates from service and subsequently takes a withdrawal from his employer sponsored QRP. How would this affect his ability to take a lump sum withdrawal to get the benefit of NUA?
Thanks
BruceM
Permalink Submitted by Alan Spross on Tue, 2007-10-02 17:21
Bruce,
An intervening distribution is a plan distribution occurring in a year following a triggering event that is not the LSD year. If that happens, it wipes out the chance to take a qualified LSD and use NUA until another triggering event comes along. A new triggering event “re qualifies” someone for the LSD and NUA.
Besides the triggering events of death and disability, the only ones available to a healthy individual are the year of separation from service and attaining age 59.5. Whichever of those comes first qualifies the taxpayer for the LSD. If an intervening distribution is taken, he is disqualified, but then re qualified when the second event hits.
Therefore, someone who separates at 55 qualifies, but if the plan allows installment distributions which are taken to avoid the early withdrawal penalty, an intervening distribution has occurred. But not a problem, because the taxpayer only needs these installments until 59.5 anyway, when he gets a new triggering event. At that point he must not take any distributions until the year of the LSD, because there will be no more triggering events for him unless he dies or becomes disabled.
For someone who takes no distributions, but waits until the RMDs kick in at 70.5, the RMDs become intervening distributions and wipe out the last chance at NUA unless the LSD is taken in the same year as the first RMD.
The IRS has interpreted the Regs that indicate the LSD must follow a triggering event to mean that the LSD does not have to immediately follow the event, and in fact can be years later………as long as there are no intervening distributions in any year in between.
Permalink Submitted by [email protected] on Tue, 2007-10-02 21:31
Alan,
Just wanted to say thank you for your answers and also for the clarification to Bruce’s questions. That helps clarify it even further.
I will be sitting down with the client shortly so that we can plan the entire strategy.
Gautam
Permalink Submitted by BruceM on Wed, 2007-10-03 22:48
Alan
😀 Thanks again for your clarity.
Interestingly, there doesn’t seem to be anything about intervening distributions in Pubs 575 or 939, but it does discuss this in the instructions for completing form 4972.
BruceM