Doing first NUA transfer and need help!!!

Submitted by Stephen Rhodes on Tue, 2008-03-18 17:59

I am meeting today (sorry for the short notice) with a client that has about $300k in a company 401k plan and has approx. $50k in low basis company stock. I am looking to rollover the $250k to my managed platform and the other to a brokerage account. Couple of questions:
1. Can I do both transfers separately? or do they have to be done at the same time?
2. What does the client pay taxes on (the cost basis of stock)? Capital gains rate or income tax rate? and when?
3. When doing the NUA transfer how do I specify that it is a NUA transfer to avoid it appearing as a distribution?
4. In the future when the client sells this stock (after transfer is complete) they only pay tax on the gains and they pay at the capital gains rate correct?

This client is also director of HR for a huge company and can possible lead to many more of these transfers so I want to make sure I fully understand the ins and outs. Thanks a million!

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Permalink Submitted by Alan Spross on Tue, 2008-03-18 21:03

1) They can be done separately and in no particular order, however a full LSD must be completed in the same calendar year. All assets in plans of the same type (eg DC plans) must be distributed from the employer.

2) Client should get a cost basis quote from the plan administrator. The cost per share is taxable in the year of distribution at ordinary tax rates. It is also subject to early withdrawal penalty if client is under 59.5 unless client also meets the separation at age 55 exception. The NUA is not taxed until client sells the shares in the taxable brokerage account, and then at the lower LT CG rates. Additional gains above the NUA per share are taxed at LT rates after the shares have been in the account for a year, and at ST cap gain rates prior to a year. There is NO step up in value on the NUA value per share if client dies, as NUA is an IRD asset.

3) The plan administrator should be told that how many employer shares, and if they have different cost bases, which ones go to the brokerage account for NUA, and which shares along with other assets go by direct rollover to an IRA. Any shares that reach an IRA are no longer eligible for NUA treatment. The NUA shares actually are a distribution, but only the cost basis is taxable currently. This will be broken out on the 1099R.

4) Right, except for gains that occur AFTER the distribution, and for those gains the 1 year holding period applies in the brokerage account. All NUA gains prior to distribution are taxed at the LT rate even on the next day after distribution.

Most plans assign cost on an average cost per share basis. But some may have different costs on different lots. Other plan may contain spun off subsidiaries that remain eligible for NUA as well. Each stock would have it’s own cost basis.

It is vital to do the LSD when the client can meet the requirements for a qualified LSD. There are two triggering events. Separation from service and reaching age 59.5 are those events, and to utilize NUA there can be no years of intervening distribution from the plan or the LSD is not qualified. As long as no distributions are taken, a number of years can pass.
Example: Client retires at 55 and is qualified due to separation from service. He remains qualified in later years, BUT if he takes distributions from the plan in a year before the LSD year, these are intervening distributions. He must then wait until age 59.5, which is a new qualifying event. He must then avoid intervening distributions until he does the LSD. If he waits too long and RMDs begin, the RMD would be an intervening distribution.

Here is more information regarding the strategic planning aspect:
http://www.fidelityresearchinstitute.com/pdf/nua_may2007.pdf