Options for Retirement Plan with LARGE AFTER-TAX balance
I would appreciate your opinion on the following case that I have recently come across. A new client, who is interested in transferring her 401k from her previous employer to an IRA, brought me her statement. Her 401k statement indicates that she has made “After Tax Contributions” of $209,193.55. In addition, she indicates to me that 29% of her plan assets (approximately $148,687) is company (Target) stock. I assume that she can take a “lump sum distribution” of $209,193.55 from the plan and place it into a non-IRA account and no tax will be due. I also assume that she could take a lump sum distribution of the company stock (approximately $148,687) and pay a tax when the stock is sold. Again, I assume that the tax is deferred on all of the net unrealized appreciation unless she sells the stock once transferred from the plan.
It is also my understanding when she sells the stock after it has been transferred from the plan it is taxed as long term capital gain up to the amount of the NUA. How about any gain that is more than the NUA? Is there any advantage to rolling any of these assets to a Roth IRA? My client is closing in on age 59 in a few months and has found gainful employment. Her income is approximately $78,000. She is married. Her husband earns approximately $50,000 and plans to retire in April of 2009.
I would appreciate your opinion on this situation. If there is a way to illustrate the different scenarios and the tax results that would be TERRIFIC!
Permalink Submitted by Alan Spross on Tue, 2008-08-12 00:13
Your assumptions are correct, but to utilize NUA she must be sure to execute a qualified lump sum distribution in a single year.
Gain in excess of the NUA after distribution is taxed ST up to one year and LT after that. If after tax contributions can be allocated to the cost basis of the NUA shares, it will reduce the current tax due for the cost basis portion of the company shares. While she needs to get a cost basis quote from the plan, she should also request options regarding assignment of the after tax amount to the company stock vrs other assets in the plan.
Another strategy to seriously consider is the ability to make a direct Roth conversion from the plan. This is newly available this year, and the 100,000 income limit applies, so their joint income is likely too high until 2010 when the income limits disappear. It may pay to wait until then and that will also give the retail sector a chance to recover and increase the NUA of Target shares.
But if you want to proceed, it will take a detailed tax analysis since there are so many variables involved what with the NUA and high tax basis in the plan.