NUA
A former Exxon employee who is now retired has a thrift plan containing Exxon Stock. About 60% of the stock is tax deferred and 40% tax paid or after tax. He had money in an Exxon retirement plan which he rolled to an IRA upon retirement several yaears ago. Now he wants to do a complete distribution from the Thrift Savings Plan and take advantage of the NUA tax benefits. Here are the questions. Can he take the tax paid portion of the account, isolate it if you will, and distribute that portion only to himself without paying any income taxes on the stock basis and assuming he sells that stock pay only a capital gains tax. At the same time (or during the same year) he would roll the tax deferred portion (roughly 60%) into an IRA. Within the IRA he coulld sell the stock and do whatever investing he wanted to with with no tax issues.
The second part of the question is the fact that he rolled the pension account into an IRA in a previous year, does this violate the rule of having to distribute the entire plan within one year rule or is the pension plan considered separate for this purpose.
Any thoughts or comments would be appreciated.
Permalink Submitted by Alan Spross on Sun, 2011-02-27 20:19
There are a few facts that need to be determined before we know if NUA is still viable:
1) The intervening distributions issue. The prior distribution will not prevent a later lump sum distribution (LSD) from qualifying if there is a new triggering event since the prior distribution. The triggering events are separation from service, reaching age 59.5 and death. An intervening distribution will eliminate the LSD opportunity if made after the latest triggering event. For example, employee could retire prior to 59.5, take an intervening distribution which includes an IRA rollover, reach 59.5 which is a new triggering event and then take the LSD anytime prior to the next intervening distribution. If there have been no distributions after 59.5, the LSD must be completed before RMDs begin, since the RMDs are intervening distributions.
2) LSD must include all plans of a similar type. Pub 575 indicates the plan types as profit sharing, pension, and stock bonus plans. Whatever type the thrift plan is considered, and other plans remaining with the employer must also be distributed for the LSD to qualify for NUA treatment. Any other plans need to be distributed in the same year, not necessarily on the same date. The plan administrator can provide answers as to plan types. If this is the only plan remaining, then this question is eliminated.
3) He cannot isolate basis with the exception of any after tax contributions made to the plan prior to 1987. All other distributions must be pro rated between pre tax and post tax balances. The post tax % will reduce the cost basis he would be taxed on. For example, if his balance is 10% post tax, and the NUA cost basis is 1.30 per share, then his taxable amount for the distribution will be 1.17 per share. The amount of NUA and the taxable amount will show on Form 1099R. If the gross distribution is more than the taxable amount plus the NUA, the difference is the post tax amount allocated to the shares.
4) If NUA shares are distributed, the NUA can be aborted if desired and the shares rolled into an IRA within 60 days. Employee can only split the treatment on entire shares. For example, if 500 shares are distributed, he could roll 300 to an IRA and sell or retain the other 200 for NUA purposes. But he cannot split any shares up between the cost basis and the NUA and roll over any portion of a share that will be utilized for NUA or the cash after the NUA sale. So if he wants to do a rollover, he must select a number of shares and roll all of that share value into an IRA. If there is after tax contributions that represent a portion of the rollover value, then a Form 8606 should be filed to report the IRA basis on line 2. In summary, the employee cannot split combine cap gain with a rollover to eliminate the tax on the NUA cost basis.
The combination of after tax employee contributions with NUA cost basis is confusing, because they are two unrelated concepts. NUA cost basis is what the plan paid for the shares when purchased irrespective of whether that cost is funded with post tax or pre tax dollars. Generally, the NUA cost basis should be less than 30% of the FMV for NUA to be useful, unless the employee needs the distribution for current expenses. The after tax basis is only applied to reduce the taxable portion of the NUA cost basis.
In this case, since employee has both factors in play, it will take some diligence to identify the complete tax impact of distribution of NUA shares.