NUA and 401k
I am 67 years old, retired but still have money in my old company’s savings plan (401k retirement plan). It’s been suggested that I withdraw the money under the guidelines of “Net Unrealized Appreciation” (NUA). My question: “To use a NUA, a lump-sum distribution has to be made on the plan participant’s entire balance (within a single tax year) from all the employer’s qualified plans. If some money (no stocks involved) was previously taken out of the 401k account (rolled over into an IRA five years ago) can the employer securities in-kind (stocks) still in the 401K retirement plan be transferred to a taxable (non-retirement plan) account using NUA as long as the “entire balance” of the account is withdrawn in a single tax year”? If the answer is “NO” then what specifically prevents me from using NUA . IRS Publication 575 would seem to infer/allow the use of a NUA on the balance of a retirement plan as long as the “entire balance is taken out within one tax year”.
I’ve been told that since I’ve taken a distribution from my 401k five years ago that I can not use NUA on my 401k even if I remove the entire balance.
As long as the “entire balance” in a single tax year is removed from the 401k, where is the rule/requirement that says that NUA can only be applied to the “first distribution that occurs after a “qualifying event”?
Permalink Submitted by Alan - IRA critic on Wed, 2014-05-28 23:14
What you heard is correct. First, you must have a triggering event such as separation from service or reaching 59.5. After the triggering event, the entire balance of the plan and similar plans must be distributed in a single tax year in order for the LSD to be qualified for NUA treatment. If you took an intervening distribution (ie did not fully distribute the balance) in a year and then in a later year you completed the LSD, then the distributions were not taken in a single year, they were taken in two different years. This is described on the top of p 16 of Pub 575, but you have to understand what the IRS means by “within a single tax year”. You do not have to complete the LSD right after the triggering event, you could wait for a number of years, however, the first year you take a distribution that does not include an LSD, you have taken an intervening distribution. This is OK as long as the other distribution is in the same year as the LSD, but not in a different year.