NUA for pre age 55 distribution of previous employer plan
I have a client whose large gas company refinery was purchased by another company about 8 years ago, when he was in his mid 40’s. the client is now within a few years of age 55, and has over 1 million entirely in the former employer’s 401(k) in company stock. He is eligible to roll the funds out, but never has.
The basis of his stock is as follows:
Leveraged plan Basis: $55K Value $400K+
Stock plan Basis: $225K Value 700K+
The idea I am contemplating at this point is to liquidate and diversify the stock plan, and consider NUA for the leveraged plan, which is a separate plan. The custodian indicated they can be separated for NUA purposes.
A few questions:
1. where the client is under age 55, what will be subject to a 10% penalty if he elects NUA now? Looking at just the leveraged account, would it be the whole balance of $400k+, or (as the dinkytown calculatror suggests), just the 55K?
2. If he waited until age 55 before making the distribution, and then retired from his current employer, would that avoid the 10% penalty, or is that a moot point since he already separated from the prior employer at age 45 or so? IN other words, does the 10% penalty follow the specific employer plan, or when the employee separates from service and retires altogether? His refinery was bought out, so he involutarily ended up with a new employer. Is there another exception to the 10% penalty I am not aware of?
This account represents well over 1/2 of his net worth, so I need to make sure I am taking all available info into account. If there are any pitfalls I may not be thinking of, I’d appreciate any feedback.
TH
Permalink Submitted by Alan Spross on Tue, 2011-03-08 03:12
1) Just the 55k
2) Assuming the present employer is not the acquirer of the former company, waiting until 55 would not eliminate the penalty. If it is the acquirer, the disposition of the former plan may be relevant. The penalty exception only applies to the plan from which the employee separates at 55. However, there are other penalty exceptions in Sec 72t that might apply, such as disability and high medical expenses over 7.5% of AGI.
The largest pitfall is lack of diversification, not the tax issues. Sounds like he has all his eggs in one basket. You should confirm the types of plans these are, because NUA is contingent on doing a qualified LSD of all plans of a similar type. Examples are all profit sharing plans, all stock bonus plans or all pension plans separately. Also check to see if there are any other plans you did not mention. Selection of the leveraged plan shares for NUA is preferable because the % cost basis is lower. I assume the other plan will be sent to an IRA in a direct rollover, after which the shares could be immediately sold for diversification purposes.
One last consideration – if he has any basis in the plan from after tax contributions, the plan assignment of those contributions to NUA stock can reduce the taxable cost basis and the penalty thereon. Knowing how the plan allocates any after tax contributions is material. Of course, this form of basis is separate and distinct from NUA cost basis.