NUA vs Roth Conversion

Submitted by Mhotchkiss on Tue, 2014-07-15 15:16

I’m interested in hearing other’s opinions on when it may make sense to take NUA treatment during a LSD vs complete rollover and conversion to Roth. My initial analysis suggests that if you intend to spend the money soon, NUA makes more sense but if you intend to defer consumption of the money for a long period of time, the Roth conversion seems to be a better solution. “Spending the money” may include using the proceeds to pay the taxes on conversions of the non NUA balance.
Thanks in advance. – M



Submitted by Alan - IRA critic on Wed, 2014-07-16 19:31

  1. Since there are so many wild cards in this analysis, it helps to break it up into two parts. The traditional analysis addresses taking the NUA shares vs. rollover to a TIRA and the following article may help in this respect:  http://www.csa.us/www/wp-content/uploads/Docs/NUA-FPAJournal.pdf. If this analysis results in doing the rollover, then converting the funds rolled over to a Roth IRA can be analyzed using one of the many programs for that. Most likely, any Roth conversion is better done by converting incrmental amounts over several years in order to keep the tax rate paid on the conversion from escalating.
  2. If the 401k hold a considerable amount of basis, much more than the present TIRA has by percentage, then it may be desirable to compare a direct Roth rollover vrs distributing the NUA shares. This basis (entirely different than the cost basis on the shares) will result in a lower tax bill for both a Roth rollover as well as reducing the taxable cost basis determined after calculating the amount of NUA. It is also possible to isolate that basis in order to direct the after tax contributions to the Roth IRA and the pre tax amount to a TIRA. The plan administrator or the plan document should be consulted to determine how any after tax contributions are assigned between the company shares and the rest of the 401k, since when NUA is elected, a separate 1099R must be issued showing the assigned basis in Box 5.  Complexity is extreme when there is considerable after tax contributions made to the plan, since the combination of options is very high.
  3. Any analysis done must also address proper diversification because a taxpayer should not sit on a very large single investment due to the obvious risks. Diversification should always trump tax benefits because loss of principal is much more punitive than loss of a 20% tax benefit.
  4. Remember that the top CG rate has just gone to 20%, and very few states provide a break on the state return for LT gains.
  5. Note that if the shares are distributed for NUA benefits, no part of the sale proceeds can be rolled over. However, an employee CAN request some shares to be distributed and roll over the rest to an IRA, or even take the distribution and do the rollover personally within 60 days if it is determined to be beneficial not to use all the shares for NUA.

Submitted by Bruce Steiner on Thu, 2014-07-17 02:47

The availablity of the Roth conversion is an additional factor to be considered in deciding between NUA and rollover.  

Submitted by [email protected] on Fri, 2014-07-18 18:43

Thanks for the inputs.  What I’ve found is that if they plan to hold the money for long period of time, the Roth Conversion seems to make the most sense.  Of course, you would manage the conversion process to the desired tax expense, whether that’s lump sum or over years.  If they are going to need to spend the money relatively soon, the NUA tends to be the better option.  I know there’s no “rule of thumb” that covers all scenarios, but if this conclusion of mine is incorrect “in general”, please let me know. Thanks. – M

Submitted by Alan - IRA critic on Fri, 2014-07-18 19:34

Agree. If retirement funds need to be spent soon. NUA provides the lowest tax costs as long as the cost basis is fairly low.

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