Using After-Tax Funds for NUA

Submitted by Eric Fuhrman on Mon, 2014-09-22 15:58

Suppose a client is separating from his employer and has a 401(K) worth $1,000,000. Of this amount $250,000 is employer stock with $100,000 basis. This account also contains $130,000 of after-tax contributions. Can the employee use $100,000 of the after-tax funds to reduce the cost basis on the stock to $0 for purposes of an NUA and perform a Roth conversion on the remaining after-tax funds?

How would this be reported on the clients 1099R? Thanks.



Submitted by Alan - IRA critic on Mon, 2014-09-22 17:27

  • The plan provisions will determine how the after tax contributions are allocated to the various portions of the plan. This needs to be determined to know in advance if NUA is viable instead of waiting for the 1099R form to show the taxable amount of cost basis on the shares. As part of the LSD, under last week’s IRS Notice 2014-54 the client can specify the destination account for the remaining after tax amount. Therefore, client could request a direct rollover of the pre tax portion of the plan (excluding the NUA shares) to a TIRA and the remaining after tax amount to the Roth.
  • There would be two 1099R forms – one for the distribution of employer shares and another for the direct rollovers to TIRA and Roth IRA. If client also has a designated Roth (401k), there would be a third 1099R for that rollover to a Roth IRA.


Submitted by Eric Fuhrman on Tue, 2014-09-23 13:13

For illustrative purposes, assume the plan provisions allow you to allocate after-tax funds to the cost basis of employer stock in the example I provided.  The figures are a $1,000,000 401(K) contaning $250,000 of employer stock with a $100,000 basis and $130,000 of after-tax contributions.  If the after-tax funds are allocated to the cost basis of the NUA would the 1099R read as follows:  Box 1 Gross Distribution, $250,000, Box 2a Taxable Amount $0, Box 5 Employee Contributions $100,000, Box 6 NUA $150,000?  The only taxable implications would be the long term capital gain tax due on the $150,000 of appreciation if the client decides to sell the shares?  The individual could further allocate the remaining $30K of after-tax funds to a Roth conversion (generating a separate 1099) and rollover the remaining pre-tax portion to a TIRA?I just want to verify that I have a complete understanding of how this will be treated if the plan allows for it.  Thanks.  



Submitted by Alan - IRA critic on Tue, 2014-09-23 18:46

The 1099R for the stock distribution would look as you stated. Only the NUA would be taxable upon sale of the shares unless the shares gained after the distribution. Under Notice 2014-54 the employee could then designate his Roth IRA as the destination account for the remaining 30k of after tax contributions, and the remainder could go to a TIRA. The Notice could also assist in assignment of the after tax amounts first to the cost basis as well, unless the plan provisions state that the after tax amounts must be pro rated over the entire plan. It is always advisable to determine in advance how the plan will issue the 1099R, since tax reporting will be expected to conform to the 1099R.



Submitted by [email protected] on Fri, 2014-09-26 15:48

How is this part done – “If the after-tax funds are allocated to the cost basis of the NUA…”?thanks, m



Submitted by Alan - IRA critic on Fri, 2014-09-26 20:45

The plan provisions will determine how the after tax contributions to the plan are allocated. If they determine some or all of those contributions were allocated to the company stock, then this would be reflected on the 1099R reporting the NUA distribution. It is possible some plans permit employee choice, so it cannot hurt to ask the plan to assign the after tax amount to the employer shares to reduce the taxable amount in Box 2a of the 1099R. It would not change the amount of NUA. Another possiblity is that the plan document calls for pro rating the after tax contributions across all parts of the plan. The plan document determines, not IRS rules.



Submitted by [email protected] on Fri, 2014-09-26 20:57

great.  thanks.-m



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