NUA and after-tax dollars in 401k

Submitted by Jeremy Burger on Thu, 2013-10-31 16:25

I have a client with a $1.1 million dollar 401k that we’d like to rollover to an IRA. He turns 70.5 next year.

Roughly it breaks down as follows:

$85k of vested after-tax dollars – maybe $40k contributions
$165k company stock with a cost basis of around $40k.

First, to do the NUA, is this the proper process (in the same calendar year)

1. Do a direct rollover of $935k to an IRA
2. Once done, do a lump sum distribution of company stock. Pay tax on the $40k and then pay capital gains on the $125k whenever the stock is sold. No need to worry about the 20% withholding.

If that is correct, what happens to the after-tax contributions. I know most distributions are pro-rate, but any guidance would be appreciated.

Thanks



Submitted by Alan - IRA critic on Thu, 2013-10-31 18:59

  • The plan provisions will determine if the entire basis can be assigned to the company stock or not. If the after tax contributions were 40k and was all assigned to the NUA shares with a cost basis of 40k, there would be no ordinary income to report per the 1099R. Hopefully, the client has taken no prior distributions from this plan after age 59.5 or retiring, whichever came last. Such a distribution would disqualify the required lump sum distribution to qualify for NUA treatment.
  •  If client waited until next year to do the LSD, his first plan RMD could be satisfied by the stock distribution, even if there was no taxable cost basis. IRA RMDs would then not start until 2015.

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