NUA and Roth Conversion
Hello…
I have a client that is doing an NUA for 3m of stock with 1m of basis. The basis and NUA will be moved to a brokerage account and 1m will be recognized as a 401k distribution. Client is 63. Is it safe to assume that in 2010, the client can claim the 1m in 2010, pay the taxes on 1/2 in 2011 and 1/2 in 2012 and convert the 401k to a Roth account?
thanks
Kevin
Permalink Submitted by Alan Spross on Fri, 2010-04-09 00:54
Kevin,
Client cannot combine any NUA tax benefit with a rollover of any part of the stock distribution of that 3m. Client’s options are:
1) Can use NUA and pay tax on the 1m in 2010 and can also directly roll the rest (amounts still in the 491k) to a TIRA or Roth IRA. If to a Roth IRA, that income can be split between 2011 and 2012, but the 1m of ordinary income will be reported in 2010.
2) Client can change his mind and roll all these stock shares over to a TIRA or Roth within 60 days of distribution if he decides against using the NUA. That would eliminate taxes on the 1mm for 2010 and also eliminate the NUA benefit.
3) The rules are not really clear whether he can now split the 3mm into NUA shares and roll over other shares to an IRA. The rules as written suggest that he can roll over all or nothing with respect to these shares within 60 days. If he wants to use fewer shares for NUA, he could have fewer shares distributed to a taxable account in the first place and roll the rest directly from the plan to an IRA. But once the shares are distributed to a taxable account, it is likely an all or nothing decision with those shares. In addition, any NUA shares lose NUA treatment once they reach an IRA account.
In this situation, diversification should remain the top priority, and that sometimes argues for retaining fewer NUA shares unless of course he plans to sell those shares earlier rather than later, and just wants the lower LT cap gain rate. That 15% rate is also due to expire at the end of the year and probably will for higher income taxpayers. It could go to 20% or higher.
If I did not interpret your original post correctly with respect to the 401k conversion, please advise. It is critical that he complete a qualified LSD for all plan assets in the same year to utilize NUA. Finally, to be a qualified LSD it must follow a triggering event with no intervening distributions. Triggering events are reaching age 59.5 and separation from service. This means that if he retired at age 61 and has already taken plan distributions at 62, he no longer qualifies for NUA because there cannot be a year with intervening distributions after the triggering event and before the LSD year.