NUA to ROTH?

Submitted by Thomas Nichols on Sat, 2012-12-22 14:20

I recently (22 days ago) took a total distribution of my 401k. The distribution was paid in both cash and company stock. When they made the distribution in company stock they treated it as a NUA, triggering a taxable event for the cost basis. I wanted to roll part of the stock (as stock) to my ROTH stock account. Can I still do this? Thanks a bunch…



Submitted by Alan - IRA critic on Sat, 2012-12-22 16:03

Yes, but you cannot use NUA for shares you roll over to an IRA, so depending on what your NUA cost basis is (%), this could result in a larger tax bill than the NUA cost basis. Shares you roll over to a traditional IRA would eliminate current tax on those shares, however. What is your NUA cost basis as a % of the share value? And do you have any after tax contributions in your plan?  I assume there was 20% withholding on the cash portion of your distribution, and the plan did not directly roll ANY portion to a traditional IRA?

Submitted by Thomas Nichols on Sat, 2012-12-22 17:42

Thank you Alan for your response and help. When I got my stock distribution the company broke it up into two groups, but treated both groups as a NUA distribution.The first group the cost basis is 48% of the value.The second group the cost basis is 12% of the value.So I wanted to skip the special tax treatment of the NUA with the first group and roll it into a Roth stock account paying the tax on the full value of the stock.The second group, with much lower cost basis, I wanted to just keep as a NUA with the special NUA tax treatment. Paying tax on the cost basis now and capital gains when I sell.All of this is pre-tax money.  Nothing was withheld but they said the total cost basis (of both groups) was going to be reported on a 1099-R.

Submitted by Alan - IRA critic on Sat, 2012-12-22 19:37

  • There are only a few plans that provide accounting for NUA cost basis with different lots of shares instead of requiring an average cost over all shares. Seems they would have to provide you with  two 1099R forms to separate the cost basis in a form that the IRS would unlikely question. If they just provide you with one 1099R, it will result in IRS problems if you pay ordinary tax on the 12% cost shares only.

 

  • There is no question that you can roll certain of the shares over to an IRA and use NUA for the remainder. However, the rollover usually goes to a TIRA, not a Roth, thereby eliminating the taxes. If you roll the high cost shares to a Roth IRA, you will be taxed on the full value of those shares. However, once in either a TIRA or a Roth IRA you could sell the shares right away and get the safety of better diversification since you will still have the company shares in your taxable account until you sell them.

 

Submitted by Thomas Nichols on Sat, 2012-12-22 22:36

Alan, Thank you so much for your help. I feel much better that I can roll certain of the shares over to an IRA or ROTH IRA and leave the rest as NUA stock. The company gave me all the number (cost basis, value, # shares, etc) for the two groups so even though they only give me a combined 1099-R, I will be able justify the split. Diversification is good. At one point in time, I had 95% of ever dollar I had in company stock. But now I will down to 10% and I am OK with that. I wonder how I slept at night.Thanks again and have a great holiday…

Submitted by Thomas Nichols on Mon, 2012-12-24 16:25

Well I went to my financial instutution today, to have the NUA stock rolled over to them so they could deposit the stock in my Roth Brokerage account and they said NO Way, No How.  They continued to say, “Once the stock is distributed from a 401k as NUA stock, that is it and its final. There is No 60-day indirect rollover period to get the stock into a IRA or ROTH IRA brokerage account. Its a big financial instutution that starts with a V. (I am 30 days into my 60 day window).

Submitted by Thomas Nichols on Wed, 2012-12-26 03:51

Now I get a letter from my 401k plan administrator saying:”Remaining Rollover: xxxx.xx is the taxable amount remaining that is eligible to be rolled over into an Individual Retirement Account (IRA) or another eligible retirement plan that accepts orllover contributons.  If you wish to do a rollover, it must be done within 60 days of receipt of your payment. Please consult your attorney or tax advisor for more information.” The xxxx.xx is the exact amount to the penny of my cost basis of the nua stock. Can someone expalin this to me? Does this mean I can put xxx.xx in a IRA?

Submitted by Alan - IRA critic on Wed, 2012-12-26 23:25

You can definitely roll over the shares or the proceeds from selling the shares within 60 days if you choose to. See the following suggested IRS notification from the plan to employees:  

If you do not do a rollover, you can apply a special rule to payments of employer stock(or other employer securities) that are either attributable to after-tax contributions orpaid in a lump sum after separation from service (or after age 59½, disability, or theparticipant’s death). Under the special rule, the net unrealized appreciation on the stockwill not be taxed when distributed from the Plan and will be taxed at capital gain rateswhen you sell the stock. Net unrealized appreciation is generally the increase in thevalue of employer stock after it was acquired by the Plan. If you do a rollover for apayment that includes employer stock (for example, by selling the stock and rolling overthe proceeds within 60 days of the payment), the special rule relating to the distributedemployer stock will not apply to any subsequent payments from the IRA or employer plan.

  There also appears to be an error in the employer’s Notice you received. If “xx” is your cost basis for the shares and “yy” is the NUA on those shares, you could elect to bypass NUA by rolling the total of “xx” and “yy” to an IRA. You can’t roll just the cost basis or the NUA per share, you must roll over the value of the entire stock. “xx” plus “yy” must equal the market value of the stock when distributed, unless you made after tax contributions to the plan that reduces “xx”.

 

Submitted by Thomas Nichols on Fri, 2013-01-11 20:04

I wish I could say I was successful, but it is not looking good. Both Vang… and TD Ame… both said they could not complete the transaction.   V… tried to sell the stock and roll over the proceeds over to the IRA/ROTH, but stopped when they realized I would have to pay capital gains on the sale of the stock as they are just treating the stock as common stock.  They say the problem is the stock no longer has the IRA attribute. They even tried to change the registration and I had to get some medallion signature guarantee.  But that failed.  As I am running out of my 60 day window, looks like I will just have to keep it as an NUA. I am now trying Wells F, and they are checking… They all say “no problem” until they find out that the stock no longer has the IRA attribute and is just plane stock in a broker account. 

Submitted by Alan - IRA critic on Fri, 2013-01-11 22:14

  1. It really should not be a problem. The only thing you cannot do is combine NUA with a rollover of the proceeds. In other words, you cannot sell the stock under NUA rules and then roll the proceeds over to any type of IRA. Vanguard was incorrect, you can sell the stock but it is not reportable on Sch D if the proceeds are rolled over. Refer to Pub 590, p 25 “Sale of property received in a distribution from a qualified plan”. But you cannot do this from an IRA distribution. Your distribution is from a qualified plan and you want to roll part of it TO an IRA, which is allowed within 60 days of receipt. Make sure they know that these shares came directly from a qualified plan.
  2. You should be able to roll over some or all of the shares to a TIRA (non taxable).
  3. Same for Roth IRA, but full value of the distribution would be taxable. 

 

Submitted by Thomas Nichols on Sat, 2013-01-12 14:14

What I am being told is when the distribution occured from my 401K they processed the distribution of the stock as a NUA and moved the stock to a taxable account. Now that the stock is in a taxable account, nobody wants to rollover stock in a taxable account to a IRA. Even though the stock originally from a qualified plan, it is now in a taxable account. I tried to get the plan administrator to change it back and they said sorry, but they do not make changes. So now the stock is no longer coming from a qualified plan. Even thouth it did 45 days ago. So it looks like my plan administrator screwed me. It’s this taxable account registration of the stock that no one can or is willing to change. Well its not the end of the world. The bottom line is I will be paying slightly less taxes now, but the big difference is that it will be in a taxable account instead of a roth tax free account. So its the future tax free portion that I will miss out on. So Vanguard said no,  TD Amertrade said no, Fidelity said no. Wells Fargo said they would try, but would probably be no as the rep was not really sure. It’s this fact that it is no longer coming from a qualified plan that is killing this even though it originally came from one 45 days ago. I am willing to try any other brokers/banks/ etc you might suggest.

Submitted by Alan - IRA critic on Sat, 2013-01-12 20:37

Refer these people to Sec 402(c)(1)(c) of the tax code and also the Pub 590, p 25 reference in my earlier post. The problem is not with your employer as you apparently ordered these employer shares to be distributed to a taxable account, but with the custodians who will not allow you to do an IRA rollover. Maybe it’s better to not even mention NUA to them as that term appears to trigger their misunderstanding of your options.  Since you are running out of time, you probably need to try to convince the holding broker (Vanguard?) to reconsider. Refer them to these references. I would think a large brokerage firm would be the best bet to understand the tax rules because of their size and resources. but Vanguard also has billions of brokerage account assets so they surely have tax experts on staff to provide accurate answers. You are NOT forced to use NUA if you choose to roll the shares over. To eliminate even more confusion, I suggest NOT selling the shares and rolling over the proceeds, but to push to roll over the shares to a traditional IRA, not a Roth. If you want to convert later, you can do that.

Submitted by Thomas Nichols on Mon, 2013-01-14 04:15

Thank you… I will give it another try.  The stock went from ComputerShare to Vanguard… Because Vanguard said they could do it. But after they changed there mind, the stock was sent back to ComputerShare. It was never rolled over, they just transfered it as taxable stock account. So now I have to wait for the transfer back. More wasted time. I understand the 60 days starts the day after you receive the stock.  They originally printed the Certificate on Dec 4. I think I got it on the Dec 6. So if I am right, Dec 7 is day one.

Submitted by Alan - IRA critic on Tue, 2013-01-15 00:47

Right, and you must have the shares contributed to the IRA by 2/4/2013.

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