NUA affecting Social Security

Submitted by Andrew Rogers on Wed, 2015-06-10 20:25

We have a customer that we’re trying to do a bit of planning around their social security for. It’s a husband and wife combo. She is 68 and already drawing SSI. He is 64 and still working. We had originally planned on his suspending at 66 until age 70.

However, we’ve now thrown NUA into the mix. We are looking at using NUA as a strategy for him. If he were to retire soon, his withdrawal from company stock as a result of the NUA calculations would be income.

This essentially leads to the question: will withdrawals that are taxed as regular income as a result of an NUA strategy affect near-future benefits from social security?



Submitted by Alan - IRA critic on Wed, 2015-06-10 21:06

A 1099R reported LSD for NUA purposes is not considered earned income for the SS earning test. However, the taxable cost basis shown in Box 2a of the 1099R will increase their joint AGI which could increase the taxable amount of SS benefits collected in that year.

Submitted by Andrew Rogers on Wed, 2015-06-10 21:22

Thanks a lot for the info.  As a follow-up question:  If the withdrawal needs taken within a year of initiating an NUA, are we able to take the withdrawal out in pieces?  Essentially, if the withdrawal is for $200,000, can we withdraw $100,000 in September of 2015 and the remaining $100,000 in 2016 to keep the income bracket lower?

Submitted by Alan - IRA critic on Wed, 2015-06-10 21:47

  • No. NUA is only available with a qualified lump sum distribution (LSD). There are two problems with the two distributions. First, the initial 100k would not be part of an LSD because there would still be a balance at year end. Second, while the second 100k would drain the account, you cannot have an “intervening distribution” between the triggering event and the LSD. The first 100k would be an intervening distribution because it was taken after his triggering event (separation from service), but prior to the LSD year, and it would disqualify the LSD in the second year.
  • NUA does not have to include all employer shares. He could sell half the shares in the plan and roll the proceeds to an IRA as part of the LSD. Then the remaining half of the shares would be used for NUA which would reduce the taxable cost basis by 50%. Note that ONLY the cost basis is taxable as part of the LSD, as the NUA is not taxable until the shares are sold which could be years thereafter. What is the % of cost basis here? NUA is typically useful only when the cost basis is less than 30% of the current value. Is 200k the cost basis or the total value?

Submitted by Andrew Rogers on Thu, 2015-06-11 19:56

Our particular client has 50,000 shares of a stock with an NAV of $12.75 and market price of $35.00.  What causes the 30% rule of thumb to occur?  Is pulling out stock with a value of 30% not worth it once you figure in the taxes they will pay immediately?  It would seem like still a benefit, especially if the capital gains portion is still nearly $1,000,000.

Submitted by Alan - IRA critic on Fri, 2015-06-12 16:53

30% is a soft arbitrary amount. It would not apply if the person needs to sell the shares in the very near future to pay expenses. However, if there is no such need, there will be an immediate loss of tax deferral on the taxable cost basis, and probably an additional loss of tax deferral as the owner sells the shares over the first few years to obtain needed diversification. If the shares are held until death, there is no step up in basis for the NUA because it is considered to be IRD. LT cap gains rates are not reflected in state income tax rates except in a few states. Even with the low federal rate on LT gains, the income is still included in AGI and will affect such things as SS taxation, IRMAA, etc.

Submitted by Bruce Steiner on Sun, 2015-06-14 16:34

In comparing NUA versus rollover, another factor to consider is that rollover allows for a Roth conversion, which will often add substantial value.

Add new comment

Log in or register to post comments