Deferring First RMD to April 1 of Following Year When Using NUA

Submitted by fairira on Thu, 2014-03-20 19:28

An employee separates from service at age 67 but takes no distributions from his 401(k) plan then or in the next few years.

He has the choice of taking his first RMD either in the year he turns 70-1/2 or by April 1 of the following year. In either case he can use the NUA option so that the full value of the distribution meets at least the RMD amount, though he must also subsequently effect a LSD of all his 401(k) employer stock using the NUA option and/or a transfer to a TIRA before the end of the first RMD year.

Q. 1: If he defers his first RMD to April 1 of the following year, can he use the NUA option to meet the deferred RMD and also use it again later in that year to satisfy his RMD for that year (after which he would complete his LSD)?

Q. 2: If he defers his first RMD to April 1 of the following year, are there any other problems or disadvantages or cautions other than a possible increase in marginal income tax rate from taking the 2 RMD’s in one year?

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Permalink Submitted by Alan - IRA critic on Thu, 2014-03-20 20:00

Yes, if the LSD is done in the second RMD distribution year, the distribution of all the employer shares to be used for NUA must be done first. If that distribution gross amount at least equals the first and second year RMD total, it will satisfy both RMDs and only the NUA cost basis will be taxable. Care should be taken not to distribute other amounts that year before both RMDs are satisfied with share distributions, because the first distributions are RMDs and cannot be rolled over in order to allow the shares to satisfy the RMD.
No other cautions except to be sure the cost basis of the shares makes sense to utilize NUA. Since these will be the first distributions of either RMD year, since the shares will apply to the RMD (both cost basis and NUA amounts), if employee changes his mind about NUA after the distribution he cannot roll the shares over because they are RMDs and not rollover eligible. In other words, he will forfeit the chance to change his mind about NUA like others taking the shares in a non RMD year could do. Note that if employee has made any after tax contributions to the plan, this plan basis should be applied to the NUA taxable cost basis to reduce it unless the plan provisions do not allow that.
Deferring the first RMD to the second year is a good strategy because the share values are usually more than just the first year RMD. Deferring the RMD to the second year will allow the share distribution to cover two RMD distribution years instead of just one.