NUA and After Tax contributions.

Submitted by Mark Hilgenberg on Tue, 2013-06-11 18:30

I read this from Alan “2) If the plan has basis from after tax contributions, allocating this entire basis to reduce the taxable NUA cost basis. This should be OK as long as it includes only the after tax amount allocated to the shares vrs the rest of the account rolled to an IRA.”

I have a client with NUA shares valued at $38,000 and a $2,000 basis. She also has $32,000 in after tax contributions to the plan. I have had providers tell me they can allocate the whole $32,000 to the NUA, is that not correct?



Submitted by Alan - IRA critic on Tue, 2013-06-11 20:25

  • There isn’t direct IRS guidance on how to allocate the after tax amounts to the various components of a lump sum distribution including NUA shares. The IRS will be guided by the 1099R forms issued, and it’s unlikely the IRS will question the application of after tax contributions indicated in the forms. There will be one 1099R for the usual direct rollover of the non NUA shares and a separate 1099R to address the NUA shares distributed to the employee. It’s to the employee’s benefit that after tax amounts are used to reduce the NUA cost basis first, but not so much that the NUA itself is also reduced, since NUA is taxed at the lower LTCG rates. It would be more productive if possible to apply the remaining 30,000 of after tax contributions as a tax free Roth IRA conversion since the NUA cost basis will already be eliminated by applying just 2,000 of the after tax contributions.
  • If the client chose to go with the indicated plan allocation where the after tax contributions were limited to the company shares, the 1099R for company shares box 1 would be 38k, taxable amount in 2a would be blank, box 5 after tax amount would be 32k and box 6 NUA would be 6k.

Submitted by Mark Hilgenberg on Tue, 2013-06-11 21:14

Thanks Alan, that is how I understood it. If a client has a large exsisting IRA, is there still a way to use the $30,000 after-tax as a roth conversion? My understanding is no.

Submitted by Alan - IRA critic on Tue, 2013-06-11 22:38

Having a large IRA does not affect the taxable amount of a rollover from a qualified plan directly to a Roth IRA. There are two ways to convert the 30k tax free directly to a Roth IRA. Form 8606 and pro rating will not apply, but doing with along with NUA involves several variables:

  1. Ask plan to do a direct rollover of the 30k to your Roth IRA and the rest of the plan (excluding NUA shares) to a TIRA. This is the “easy way” because it avoids any 20% withholding, but the IRS in Notice 2009-68 indicates that the after tax amount should be pro rated between both IRAs (and any NUA shares). Nonetheless, the IRS never revised the 1099R Inst for plans to break out the after tax vrs post tax amounts between the two and taxpayers have done these tandem rollovers without issues since that time. If this is to be considered, it is best to wait until around November as it will then be too late to change the 1099R Inst for the 2013 tax year.
  2. The “safe way”. This method is secure and protected by the tax code, but it requires a distribution to the employee who then does 60 day rollovers, first to the TIRA of the pre tax amount and second to the Roth IRA. Taxpayer has to replace the mandatory 20% withholding to complete these rollovers. Note that this second method when used with NUA will result in a combined 1099R with the NUA shares and the other funds distributed directly to the employee. Either way, it is wise to determine what the 1099R forms will show before acting.

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