NUA and RMD's - Ed Slott and Company, LLC

Submitted by Richard Hopkins on Thu, 2014-11-20 00:18

I want to confirm that I am giving a prospect the correct information. He retired in March of 2014 at 74 years of age from a company with a 401k. No 401k distributions have been taken after employment termination, nor have any RMD’s been taken. Sources include pre tax and after tax funds as well as an ESOP.

The Client plans on taking the ESOP stock as an NUA distribution between January 1, 2015 and April 1, 2015 (of course transferring the shares to a brokerage account) and the remaining value of the 401k as a lump sum distribution via a rollover to an IRA between April 2, 2015 and December 31, 2015.

The Client has not initiated RMD’s and plans on taking his first RMD for the 12/31/2013 valuation prior to April 1, 2015. Of course, the Client will take the RMD for the 12/31/2014 valuation prior to 12/31/2015.

The Client is fully aware that he will receive a 1099-R for the cost basis of the NUA shares as this is reportable income in 2015. My understanding is that he can also sell the shares at any point subsequent to the delivery to the brokerage account subject to long term capital gains.

The clients objective is to minimize any taxable distributions. Therefore I want to clarify that the ‘market value’ of the NUA in-kind distribution can be counted toward fulfilling the RMD for 2014 and 2015 ? Since the Market Value of these shares exceeds the sum of the required RMD’s we are setting an expectation that no additional tax will be due. If so, how will the market value be reported on the 1099 ?

Your comments are greatly appreciated.

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Permalink Submitted by Alan - IRA critic on Thu, 2014-11-20 03:20

You are correct that the transfer of NUA shares are attributed to the 2014 (first) and then the 2015 RMD. The plan will have to confirm that the plan RMD can be aggregated, but it’s possible that the shares can only satisfy the ESOP RMD and not the RMD for the balance of the 401k plan. In other words, do the RMDs for the ESOP and the rest of the plan have to be separately satisfied?
Yes, the sale of the shares will get LT cap gain treatment any time after distribution up to the NUA per share. If there are additional gains before sale, the additional gains are taxed at ST rates if the sale is in the first 12 months.
The 1099R for the share distribution will just show the cost basis in Box 2a (reduced by the after tax contributions assigned to the shares) and the dollar NUA amount in Box 6. Therefore, supporting statements must be retained showing the number of shares distributed so that the cost basis per share is documented for the eventual Form 8949/Sch D reporting of the share sales. There will be a separate 1099R for the direct rollover of the balance of the plan coded G.
Based on Notice 2014-54, any after tax contributions assigned to the balance of the plan should be split such that a direct rollover of the basis goes to a Roth IRA. The pre tax amount can go to a TIRA. There is no tax due for either of these direct rollovers.
In summary, there will be transfer of the shares to a taxable brokerage account, and most likely two direct rollovers of the balance of the plan and the direct rollovers must be completed before year end 2015 to have a valid LSD for NUA purposes.