NUA treatment of after tax contributions
Client contributed to their 401k plan for more than 25 years with after tax dollars (non roth) and purchased company stock. I understand that all contributions (after tax) used to purchase company stock are considered basis and will not be taxed when the client takes a distribution in company stock from the 401k plan. Any appreciation of the stock purchased with contributions will also be eligible for NUA treatment.
However, what is the tax treatment of the reinvested dividends for NUA purposes?
Permalink Submitted by Alan Spross on Fri, 2011-03-25 20:48
Dividend dollars used to reinvest in more shares adds to pre tax cost basis per share but when the reinvested shares gain the NUA amount is also increased. Same effect as a company matching contribution used to acquire the employer stock.
Remember that NUA cost basis is totally different than after tax contribution cost basis in the plan. If after tax dollars were contributed to the plan and allocated to these stock purchases, the taxable cost basis at distribution will be less than the NUA cost basis and reduce the ordinary income tax due for the distribution.