Company stock in 401K
Hi,
My friend had $120,000 company stock in her 401K contributed by company match, cost basis about $60,000. She also had about $25000 after tax contribution to her 401K. She rolled over all the after tax money to her Roth IRA in 2010. Now she is looking into taking the advantage of NUA of her company stock with all her remaining 401K. Can she do that? Did her previous after tax roll over disqualify her NUA now? Thanks
Julia
Permalink Submitted by Alan - IRA critic on Wed, 2013-09-04 21:56
It might have. NUA requires a “qualified LSD” meaning that the LSD must occur after a “triggering event” without intervening distributions. Triggering events are separation from service, reaching 59.5, or passing. For example, if she separated in 2009 and took a distribution in 2010 she wiped out separation as a triggering event. She can then wait until 59.5 which is a new triggering event. But if her intervening distribution happened after 59.5, then she would be out of luck on the NUA option. By the way, unless she needs to cash in the stock for other needs, 50% cost basis is too high for NUA to do much good. With a cost basis as high as 50%, she would sell the shares fairly soon and get the LT cap gain rate on 50% of the sale. Again, does she have the required triggering event after the 2010 distribution?
Permalink Submitted by Julia zhai on Thu, 2013-09-05 00:36
Thanks Alan. Actually she is 69. Next year she will have to take RMD. She does not need the cash, but her current tax bracket is pretty high (33%), her IRA/401k base is fairly high too. She is trying to take every strategy to reduce her RMD base. So looks like she is out of luck in this matter.
Permalink Submitted by Alan - IRA critic on Thu, 2013-09-05 01:00
Yes, the 2010 distribution was an intervening distribution, and therefore she does not qualify for the required LSD. So no reason to hold the shares any longer unless they appear to be a good investment in their own right.
Permalink Submitted by Julia zhai on Sat, 2013-09-07 10:29
Thanks so much Alan. What if the 2010 direct roll over to Roth with her after tax money does not consist of company stock, will that still count as an intervening distribution?Julia
Permalink Submitted by Alan - IRA critic on Sat, 2013-09-07 17:43
Yes. Any distribution whether rolled over or not would be an intervening distribution unless done in the same year as the lump sum distribution. She might want to run some conversion calculators to determine if there is any benefit to converting some of the balance to a Roth IRA. This is the last year she can convert without taking her RMD first, so any conversions done later on might trigger higher tax rates. The threshold for the 3.8% surtax on investment income may also come into play if it isn’t already.
Permalink Submitted by Julia zhai on Sun, 2013-09-08 10:42
Thanks so much for all your help.