NUA
Client has 401k retired for 6 years. Client took RMD’s last 5 years. Dies Feb 2008, Wife changes to her name. Forced to take RMD for 2008 before any changes per Fidelity. Now we want to use NUA for 63000 of stock (basis 8,000) balance of 401K rollover to IRA. Is she eligible to do this?
Permalink Submitted by Alan Spross on Tue, 2008-08-12 21:14
Yes.
The client’s death resulted in a new triggering event for purposes of making a qualified LSD. If the LSD is not taken this year, an RMD taken in 2008 will be considered an intervening distribution and will destroy the ability of the surviving spouse to qualify for NUA.
A distribution of either the cost basis or NUA of employer shares COUNTS towards the RMD, so there should be no need to take a separate RMD prior to the LSD, if that is what Fidelity indicates. The LSD will itself satisfy the RMD, since the RMD is not conditioned to the tax status of the distribution. The RMD cannot be rolled over, and of course these shares are NOT being rolled over.
Permalink Submitted by Roy Williams on Wed, 2008-08-13 16:29
Thanks for the help. One mistake in my question. Client passed on 12/18/2007. 2007 RMD taken prior to death. 2008 RMD taken now by Fidelity. Will the NUA still be OK if 401K is emptied entirely this year, stock certificates to Wife (now named owner of 401k) and balance to an IRA?
Permalink Submitted by Alan Spross on Wed, 2008-08-13 21:24
She should be OK with a full LSD this year. While not specifically clear, I believe that an intervening distribution must be in a year prior to the LSD year, therefore the post death RMD taken this year, while unnecessary, should not be considered an intervening distribution which would disqualify the NUA. Of course, Fidelity has control of the situation since they are responsible for showing the NUA on the 1099R.
The pre death RMD is immaterial because it was taken prior to the employee death, which was a new triggering event.
Permalink Submitted by Roy Williams on Wed, 2008-08-13 23:06
Thanks for your input. Fidelity indeed agreed with this. Unfortunately, they required (supposedly by plan docs) to pay a current RMD prior to any other requests. They took a pro-rata RMD meaning, a small amount of the stock was therefore liquidated. With the amount of stock being about 10% of the total portfolio, it was not significant. But a more favorable option would have been to include the NUA as part of the RMD.