Chuck,
Sorry did not get to your other post.

Another way of saying what Natalie Choate published is that there cannot be a distribution year between the latest triggering event and the year of the LSD. If there is, that distribution would disqualify the LSD by becoming what is known as an “intervening distribution”.

Each triggering event such as separation from service, age 59.5, death or disability washes the slate clean and opens up a new opportunity for an LSD. You are correct that age 70.5 or RMD distributions are NOT triggering events, but those distributions would be intervening distributions and would disqualify the LSD unless the LSD was completed in the same year….as Natalie indicates “within one taxable year”.

Example: Taxpayer turns 59.5, a triggering event. No distributions are taken for 10 years, so he is still eligible for an LSD. At 70.5, he postpones the first RMD to the RBD year, and finally takes the RMD. In fact, the RMD can be part of the LSD since the LSD is a distribution. If that year expires without the LSD being done, the chance for the LSD is lost for that taxpayer unless taxpayer goes back to work and separates again. However, if taxpayer dies with NUA shares still in the plan, the beneficiaries become eligible since death is a new triggering event, but probably not the one you want.

In summary, the LSD is blown not because the RMD is a triggering event, but because it is an intervening distribution if the LSD does not get done by year end.

Q2 –
Since the partial rollover must first come from pre tax amounts, the full 70,000 going to the TIRA is pre tax, whether any company shares are included or not. The 20,000 of after tax basis remains in the plan.

That said, the example seems to link plan after tax contributions to the cost basis for NUA purposes, and these figures are different:
1) Plan basis is the amount of after tax contributions made to the plan
2) NUA cost basis is the cost of the shares purchased within the plan whether derived from employee contributions, employer match or reinvested dividends of the employer stock. This is a different amount than 1) above. The example does not say what the NUA cost basis is for the company shares that did NOT go to the IRA.

We do know that 30,000 worth of company stock is distributed in an LSD to a taxable account, but not the cost basis for NUA. Let’s assume that the cost basis is a typical 20% of the fair market value or 6,000 and that the NUA is the 24,000 difference. Well, this is a rather odd example because the PLAN after tax amount is 20,000 and that more than covers the 6,000 of taxable cost basis meaning that there is no tax at all on the NUA distribution. But what happens to the other 14,000?

Again, I have never seen an example where the plan basis that remains exceeds the NUA cost basis, but my guess would be that it would be applied to reduce the amount of NUA. That would leave the NUA figure at (24,000 less 14,000) or 10,000 to be taxed when the shares are sold at LT cap gain rates.

This is not a very efficient recovery of the after tax plan basis, so perhaps the LSD should be done first in this case. The plan basis would be pro rated in that case, and some might be left to transfer to the IRA, where an 8606 would be filed to report it. In that case, the plan basis would at least be used to reduce taxes at the full marginal rate of the IRA distributions and not at the reduced LT cap gain rate.

This example shows how complex the order in which plan rollovers are done in the LSD year. The result here is the combination of rollover rules brought on by the portability rules in the 2001 tax Act (EGTRRA) whereby after tax amounts are rollover eligible. In 2002 another tax law (JCWAA) specified the rollover rule priority. Let me know if you want a link to an explanation of that one.

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It does get somewhat simpler when the 401k is fully pre tax, no pre 87 after tax contributions and no post 86 after tax contributions.

Each plan has it’s own accounting procedures for NUA shares. The majority of them use an average cost basis for all the shares, but some of them may provide for different cost basis for certain lots of shares vrs others. This provides an opportunity to roll over the highest cost basis shares to the IRA and select the lowest ones for the NUA distribution. This results in a lower cost basis and more NUA in the taxable account. Taxpayers who do not want all the enployer shares for NUA should at least inquire if this is possible with the plan administrator. After all, they issue the 1099R that goes to the taxpayer and the IRS. Some experts feel that the employer shares that would otherwise go to the IRA should be sold in the plan first, while others feel that they can be sold after they are in the IRA. If this is going to affect the 1099R figures, this is another question for the plan administrator. In most cases the shares not being used for NUA are going to be sold ASAP for diversification purposes, which should really trump potential tax benefits.

In the usual case where average cost basis is used by the plan, eg. $x per share, the NUA just disappears on shares that go to the IRA, and the same $x per share will apply to those that do not. You cannot reduce the number of shares so that the taxable account gets just the NUA and the IRA gets the cost basis. It must be done on a per share basis. The IRS has issued a number of PLRs that result in irrevocable forfeiture of NUA on any shares that spend as much as 5 seconds in an IRA account.

Does the last paragraph address your question, or am I still missing the intent?

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