trust a 1099R? NUA, 2 Years RMD, withholding

Submitted by Peter Marikle on Fri, 2014-03-07 23:54

I turned 70 1/2 last year. My company’s rep suggested a NUA strategy, and delaying payment of my 401K 2013 RMD into 2014 and doing 2 RMDs prior to 1 April 2014, I did a good bit of research and committed to this approach.

Here are some scaled approximations for my 2014 actions:

401K (completely closed as required to do NUA)
company shares $39700
Bond fund $60000
Total 401K $99700

401K closed out:
SOME Company shares to nonqualified brokerage acct : $9600 (Current FMV)
(basis value: $2800)

Rollover other company stock&bond funds to a qualified IRA : $90400
(Misc mutual fund and including some non-NUA company stock)

Thus 2 years of RMD’s were satisfied ($2900 + $3700 = $6600)
presumably based on the FMV of the stock going to the brokerage account.

Papers received showed:
Federal taxable amt: $99700 (whole 401k)
less total NUA on shares $6400
less after-tax share value $100
less rollovers $90400
= net fed. taxable amt $2800

While I have been happy with most of my broker’s actions and recommendations, there are some tax-related questions he seemed less confident about.

I need to be sure what to expect in 1099’s next year, but I get the feeling that not all brokers do it right the first time.

Come time for 2014 taxes:

1. Should I get one, two or more 1099s? All 1099-R’s?

2. What should the entries on the 1099’s be?
— presumably if only 1 1099R, I’d see 99700 in box 1 & 2800 in box 2.
— would 2b show “not determined? or total distribution? or nothing?

3. Especially, what codes in box 7?
– Am suspecting 2 1099R’s needed, one for the IRA showing a G, and presumably taxable income 0

– and one for the brokerage account showing 7 and presumably taxable income $2800
– Or maybe ONE 1099R with 7 AND G in box 7 ???
– Don’t see any other likely possibilities.
– Box 6 should show 6400 on some 1099R

4. I believe the IRA/SEP/SIMPLE box would be UNchecked on any/all of these.

5. OF MOST IMPORT:

My broker, and a colleague of his, both were firm that NO WITHOLDING was required since all the distributions were of company stock –or untaxably to a qualified IRA.

Since I’d expect the net taxable amount to generate taxes not covered by my current withholding, a penalty could likely occur! Where in the IRS regs does it show no penalty for this “underpayment”?

Remember the numbers I gave are scaled for example purposes, and the tax owed could be much higher. OK by me if I can just send a check when I file, for what is owed, but I sure want to avoid a penalty.

Neither broker could quote from where in the IRS regs the “no withholding” direction came from.

The IRS pubs are obtuse & unhelpful for this case, at least so far.

Your blogs seem the most informative, even authoritative, but am not sure you cover this case.

Thanks much.

Help if you can.



Submitted by Alan - IRA critic on Sat, 2014-03-08 01:15

  • 1)  You should receive two 1099R forms, one for the direct rollover to the IRA for 90,400 and the other for the distribution of the NUA shares for their total value breaking out the cost basis (Box 2a) and the NUA (Box 6). This would reflect the values when distributed.
  • 2)  There must be 2 1099R forms because the direct rollover will be coded G and the other 1099R will be coded 7 in Box 7.
  • 3)  Correct. The box 6 should either be 6400 (per papers representing actual FMV of stock at distribution) or 6800 as indicated by your prior paragraph. Perhaps that was prior to actual distribution date?
  • 4) Correct
  • 5) Agree no withholding on the employer shares distributed to brokerage account OR on the direct rollover (Pub 575, p 27 “Exceptions”). You will owe tax on the taxable cost basis (2700 or 2800) and if you think this will result in an underpayment penalty due to falling short of a safe harbor amount, you need to make up for the shortfall with other withholding or quarterly estimates. There is no exception due to any shortfall occurring because of NUA cost basis. The safe harbors are generally based on your tax liability for 2013 or 90% of your 2014 tax liability.
  • Note that there is apparently $100 of after tax contributions in this plan per your notes. Usually, the plan will assign this $100 to reduce your taxable cost basis on the NUA shares (from 2800 to 2700, which is why I indicated those two amounts previously). If the 1099R showing the stock distribution does not reduce 2a by $100 and enter the $100 in Box 5, then it means this basis is included in the IRA direct rollover. This is less desirable, and the only way to recover this in that case would be to file Form 8606 reporting $100 IRA basis on line 2. If you do not have any other basis in your IRA from the past, it may not even be worth reporting on the 8606 for the rest of your life with each RMD from your IRA. I would contact the plan administrator to see if they can assign this basis to reduce the taxable cost basis on the NUA shares. It is confusing but employer share cost basis for NUA purposes is entirely different than after tax contributions you made to the plan, which is a floating plan cost basis. You can hope that the plan assigns it to reduce the Box 2a taxable amount on the stock distribution 1099R.
  • I agree that the stock distribution will satisfy your 2013 and 2014 RMDs. I hope you did not do any “intervening distribution” from this plan after separation from service or age 59.5 (whichever was later) that would disqualify you from NUA, but I assume the plan would have informed you if that were the case and they knew you were asking for a stock distribution.

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