Intervening distributions-NUA
Thanks to anyone who can help. I have a new client that turned 70.5 this year and wants to roll-over his 401-k plan into an IRA rollover. He has about 35k in employer securities that I’d like to get distributed to a non-qualified account so that he can take advantage of the NUA as part of a lump-sum distribution. Problem is timing, i know this all would have to be completed by year-end and we are now at end of November. The plan administrator is insisting that he will need to first distribute an RMD from his 401-k (even though the client has until April1 2008 to take the RMD). If i can’t convince the plan administrator that the distribution of employer securites can qualify as the RMD and they insist on a separate RMD, will this be considered an “intervening distribution” and therefore, jeoaprdize the capital gain treatment of the NUA? Thank you.
Permalink Submitted by Alan Spross on Tue, 2007-11-20 20:44
No, it would not be intervening since it would all come out in the same year as the LSD. Of course, you need to be sure that there were no intervening distributions from the plan in prior years or the qualified LSD would already be forfeited.
However, you should be able to convince the plan administrator that both the cost basis and the NUA count toward the RMD. The tax status of a distribution is immaterial to qualifying for RMD treatment. Forcing an RMD in addition to the taxable cost basis may elevate his tax bracket.
It’s always safer to check with the plan to be sure what the 1099R will look like with respect to the NUA box, because that is what the IRS goes by. The danger is not only the loss of the LT cap gain rate, but also the taxable distribution of the entire value in one year after it is too late to complete a rollover.