NUA Questions

Submitted by Brian Mell on Wed, 2010-03-31 19:43

LS Distribution of $187,000 Age 40
141,000 check to custodian of new IRA
46,000 in stock cert in name (deposited to brokerage acct.) of which:
17,000 Non-Taxable
13,000 Unrealized appreciation
16,000 Reported as ordinary Income

Says elgible to rollover 16,000 witihin 60 days. If I do that will only tax be that due on basis on Unrealized shares or will that mess up NUA. Also if I roll $16,000 do I use market value as of date of distribution or date rolled back in. It has been 3 weeks.



Submitted by Alan Spross on Wed, 2010-03-31 22:13

Right now you have the 46k of NUA shares in the brokerage account. Apparently, you had after tax contributions in the plan that was allocated to the employer stock, and therefore you would owe current tax on only 16,000 if you stuck with the NUA option.

You could also roll over all the shares to an IRA within 60 days of receipt and just forget about NUA. You would eliminate any taxable income for this year by doing that, but would also lose the NUA. You would report an added amount of non deductible contributions to your IRA on Form 8606 of 17,000.

OR – you could roll SOME of the shares over to the IRA and keep the others, but then you would have to pro rate the above figures according to the number of shares rolled and kept in the taxable account, but you cannot roll over the entire 16,000 taxable amount without also rolling over the remaining 30,000. In other words, you cannot roll over a disproportionate amount of your taxable and non taxable NUA cost basis from selling the shares and keep the NUA itself. Another way of putting that is that you cannot sell some or all of the shares, report the NUA portion at the lower LT cap gain rate and roll over any of the proceeds.

You CAN sell shares and roll over all the proceeds of that sale to an IRA within 60 days instead of rolling over the shares, but if that is what you plan you might as well roll over the shares and sell them in the IRA.

What information that you were provided talks about rolling over just the $16,000, or does it just say you can rollover the stock shares within 60 days, and YOU added the 16,000 figure?

You probably have further questions, because these concepts are confusing and you do not yet have a 1099R for this distribution. Note that 28% NUA (13/46) is a rather low percentage to bother with NUA unless you need those funds right away vrs preserving them for retirement.
One question to consider is how much of that 46,000 do you need this year?

Submitted by Brian Mell on Thu, 2010-04-01 16:24

I was hoping to keep the non-taxable money 17,000. The plan distribution confirmation document said you have 16,000 of pretax you are elgible to roll to an IRA, you also have 17,000 of non-tax money that is elgible to be rolled to IRA. If you wish to do so it must be done within 60 days.

Submitted by Alan Spross on Fri, 2010-04-02 21:44

While you actually have 46,000 (if stock price is still the same) that could be rolled over within 60 days, that would be a full rollover of all the shares, and permitted. Any other of several “mix and match” activities with these shares are almost sure to eliminate your option to use NUA on any shares you retain in the taxable account. As a result, that document that suggests you can roll over 33,000 to an IRA and use NUA on any remaining shares is very suspect if that is what it suggests.

The most obvious infraction would be to sell the NUA shares and roll the proceeds over to an IRA while claiming the NUA benefit on Sch D. But there are other options that also would not work such as rolling over half the shares and utilizing NUA on the other half. If you did not want to use NUA on all the company shares, the shares you do not want should be sold in the 401k plan or rolled over to an IRA directly from the plan such that they never reach the taxable brokerage account.

To me, it appears that your only choices now are to:
1) Roll over all the shares within 60 days to an IRA. That will eliminate tax on the 16,000, but also eliminate any NUA potential
2) Keep the shares and sell enough of them to produce the 17,000 you need. You would owe ordinary income tax on 16,000 of the cost basis, and the LT cap gain rate on about 28% of the proceeds of the shares you sell. 28% is the portion of each stock share that represents NUA. If the shares have gained since the distribution date, the additional gains over and above the distribution share price would be taxed at the ST cap gain rate. These gains become LT after you have held the NUA shares for over 1 year before selling.

In IRS Notice 2009-75, even though the IRS was addressing Roth conversions, they ruled that any NUA shares converted to a Roth IRA could not be taxed using the NUA rate, but would be taxed at ordinary income rates, ie the NUA was sacrificed by the conversion rollover. The same should hold true if any you rolled any amount of your shares to a traditional IRA.

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