NUA
We have a client that has ESOP shares as well and company stock in her 401K. Are the ESOP shares available for NUA?
She is currently only 49 years old. Is there a way to do NUA strategy now without 10% early withdrawal penalty?
We have a client that has ESOP shares as well and company stock in her 401K. Are the ESOP shares available for NUA?
She is currently only 49 years old. Is there a way to do NUA strategy now without 10% early withdrawal penalty?
Permalink Submitted by Alan Spross on Thu, 2009-10-29 19:44
Generally, the ESOP shares are eligible along with company shares in the 401k. But a proper lump sum distribution must be made for all retirement plans of a similar type of the employer. The mechanics are also a challenge if the ESOP shares must be sold back to the company.
Unless one of the early withdrawal exceptions apply, the 10% penalty will apply to the cost basis amount on which taxes are due, but not on the NUA itself.
Permalink Submitted by Brian Ahmad on Thu, 2009-10-29 21:38
Just to clarify the question about NUA regarding there client. If the client was atleast 55 then the 10% penalty wouldnt apply?? Wouldnt it make sense to pay the tax on the ESOP and convert it to IRA then a Roth in 2010 if the client wanted to leave this money to the grandchildren??
Permalink Submitted by Alan Spross on Thu, 2009-10-29 22:26
That’s right. If the separation from service occurs in the year the employee reaches 55 or later, the early withdrawal penalty is waived, but only on plans from the company the taxpayer separated from at 55 or later.
Whether conversion to a Roth IRA, rollover to a TIRA, or just taking the LSD and using NUA is best is a very complex decision depending on many factors. Conversion with the intent of leaving the Roth to heirs depends on the cost of the conversion vrs the tax rate the heirs might reach in retirement and also whether removal of the conversion taxes from the Roth owner’s estate will save on estate taxes. These are just some of the many variables that should be considered.