NUA
I have a client who has a cost basis of $86,000 in company stock. Market value is $207,000, for a gain of approx. 120k. My question is when the stock is transferred in-kind to her brokerage account, is the 86k(cost basis) transferred over as cash or would I need to sell it after the transaction is complete?
Also, this client is currently in the 15% tax bracket for this year, but will be in the 25% bracket every year thereafter. That being the case, would taking advantage of the NUA still make sense? It seems as though it is basically a wash? Am I correct? I reason this because she will be paying 25% on most of her basis now versus later. Any thoughts or input would be appreciated.
Last, I haven’t worked with a client on NUA before, so I want to make sure I don’t mess it up. She hasn’t taken any distributions ever out of her 401k. She also has an ESOP, which I include in the above numbers. She is 55 and just terminated. Vanguard said they will issue a check to the IRA custodian and transfer the shares in-kind to her brokerage account. Do you see any red flags? Thanks so much.
Permalink Submitted by Bruce Steiner on Mon, 2014-10-06 19:44
You have to run the numbers, making some reasonable assumptions. NUA is sometimes better than rollover, but sometimes rollover is better than NUA, especially after taking into account the possibility of a Roth conversion in the case of a rollover.
Permalink Submitted by Alan - IRA critic on Mon, 2014-10-06 21:05
An NUA cost basis of 41.5% is not attractive for NUA unless client needs a large portion of the balance for spending needs in the next few years. In that case, paying the LT cap gain rate on the shares sold is preferable to paying ordinary income on an IRA distribution. If funds are not needed fairly soon, it would probably be better to use up the 15% bracket on a Roth conversion instead of distributing the shares to a brokerage account. Note that since she separated in the year she will reach 55 or later, there is no penalty on the 86k of cost basis. If she needs a portion of the funds for spending needs, she also has the option to have only a portion of the shares distributed and the rest sold before or after rolling them to an IRA. Using up the 15% bracket is a good idea, and this can be done by taking a distribution of just some of the shares, converting to a Roth IRA or even come combination of the two. And always remember that diverification trumps tax benefits, so she should not retain too large a portion of the shares for a long period.
Permalink Submitted by Robert Ervolina on Tue, 2014-10-07 16:06
Thank you very much. Your guidance was very helpful. One sentence I didn’t quite understand, what is the signficance of this sentence: Note that since she separated in the year she will reach 55 or later, there is no penalty on the 86k of cost basis.
Permalink Submitted by Alan - IRA critic on Tue, 2014-10-07 17:36
The cost basis is taxable in the year of the lump sum distribution. It would also be subject to the early distribution penalty if the distribution is taken before 59.5. However, there is also a penalty exception for distributions taken prior to 59.5 if the employee separates from service in the year they reach 55 or later, which she has done. Therefore, in this case the cost basis would be taxable, but not subject to penalty. The 1099R should be coded with a 2 in Box 7 which indicates that the exception applies.