Client has 401 K prior employer
Client currently 59; will be 591/2 in 3/2010. Seperated from prior employer. Has Stock with current value of $20,000. A cost basis of $6,000. Total 401K valued at 78,000. At age 59 1/2 can she exercise the NUA and pull the stock out of the 401k, pay taxes on $6,000 IRA distribution and now keep the stock in her non-qualified portfolio? I believe she needs to empty her 401k by the end of the calendar year. Are my assumptions correct? Thanks.
Permalink Submitted by Alan Spross on Thu, 2009-12-03 23:24
Yes, you are correct. If she can wait until age 59.5, she will avoid the 10% penalty on the cost basis portion, and it is also getting late to get a proper LSD done in 2009.
The other assets worth 58,000 would be directly rolled to an IRA to complete the LSD and the tax bill for the NUA stock would be based on only 6,000 at ordinary income rates. If the separation from this employer occurred at 55, then there is no early distribution penalty on the 6,000.
Age 59.5 is considered a new triggering event for LSD purposes. That means the LSD can be done after that date in the same year or in a later year if she does not take any intervening year distributions in those years. If there has been intervening year distributions from this plan after separation, then she cannot do the LSD this year and will have to wait until 59.5.
Finally, if there are any other similar plans in place such as an ESOP, the similar plans also have to be rolled over or distributed. A defined benefit plan does not count as a similar plan.
When she sells the stock, the per share cost basis will be based on the 6,000 divided by the number of shares distributed. The excess value will be NUA and gets the LT cap gain rate upon sale. If she is under the 25% federal bracket, LT gains are currently taxed at a rate of -0-, but there is no guarantee that this rate will not be raised in the future, particularly the -0- feature.