Use of NUA for a 401k Rollover 5 years after left employer
I have a client who worked for Divita and owned stock in their 401k. She left the company about 5 years ago. We are going to rollover her 401k to an IRA. Is she eligable for NUA? Her cost basis in the stock is about $6000 and the current value is $12000. If so, what is the procedure?
Permalink Submitted by Alan Spross on Fri, 2008-05-09 20:46
She might be with a proper LSD, however a 50% cost basis is not real compelling. She should get a formal cost basis per share quote, be sure she qualifies for an LSD and if still interested, the shares would be transferred to a taxable account in the same year as other assets in the plan are also distributed, typically to an IRA.
Permalink Submitted by BruceM on Mon, 2008-05-12 22:54
Another factor to take into account on the NUA decision assuming she’s eligible for the LSD, is what will be the client’s marginal tax rate. For 2008, if 10% or 15% after adding the stock’s basis to her income, then realized long term capital gains will be taxed as 0% through 2010, at least to the extent it keeps taxable income under the 15% ceiling.
Alan….if she had taken a withdrawal from her 401(k) since leaving, and between that withdrawal and today did not turn 59.5 or become fully disabled, then she would not qualify for a LSD, would she?
BruceM
Permalink Submitted by Alan Spross on Mon, 2008-05-12 23:23
Bruce,
You are correct. That withdrawal would then constitute an “intervening distribution”. An intervening distribution destroys the direct relationship between a triggering event and the LSD. There is no time limit for the LSD year as long as there are no intervening distribution years in between. After separation, the only remaining triggering event left other than death is turning 59.5. Disability as a triggering event only applies to the self employed.
Permalink Submitted by BruceM on Tue, 2008-05-13 00:01
Alan
Mucho thanks
BruceM
Permalink Submitted by Tina Frey on Tue, 2008-05-13 15:54
I believe that if she is separated from service, she only has to be 55 in order to avoid the 10% penalty.
Permalink Submitted by Alan Spross on Tue, 2008-05-13 22:02
That’s right. If separation from service occurred in the year employee turned 55 or later, then the early withdrawal tax on the cost basis portion of employer shares does not apply. There is never an early withdrawal penalty on the NUA portion.
In addition, if the distribution occurs after age 59.5, a major triggering event, there is no early distribution penalty.