NUA and after-tax contribtuions

Submitted by Glenn Wager on Mon, 2015-09-14 23:40

Question on NUA and after-tax contributions. We recently initiated a rollover from 401K to an IRA. The 401K contained 800K which included 60K of company stock with a basis of 35K and 90K of after-tax contributions. We requested a total distribution with stock in kind to utilize NUA, a rollover of the after tax money to Roth IRA, and a rollover of pretax money to traditional IRA. Instead of receiving 60K in stock with basis of 35K, a check for 90K to Roth and a check for 650K to IRA, we received 60K in stock with basis of 60K, 30K check to Roth and 710K check to traditional IRA.

Obviously they applied 60K of after-tax to the stock. Called trustee to discuss and they maintain that this is the correct treatment given the details. Is it? If it is, it obviously completely defeats the purpose of requesting the stock in kind and eliminates all NUA.

If it is correct, since we are within 60 days, and since the stock is 100% after tax I assume we can rollover the shares in kind into the Roth? Alternatively, can the shares be sold via the transfer agent (who currently has them book entry outside of the Roth) and then a check be written to the Roth to complete the rollover (since we have no interest in holding the stock without the NUA)?

Thanks in advance.

Glenn



Submitted by Alan - IRA critic on Tue, 2015-09-15 01:44

  • Glenn, it appears that Notice 2014-54 allows the taxpayer to specify where the after tax contributions will be allocated even when two direct rollovers are done and one distribution (NUA shares). The 1099R forms have not yet been issued, so perhaps the plan administrator will revise the pending tax reporting to do as requested. As it is, it appears that the plan does not intend to issue a 1099R with Box 6 NUA indicated. Was the request clear as to the 90k of after tax contributions going to the Roth IRA?
  • Note that prior to Notice 2014-54, this distribution would probably have assigned 35k of after tax contributions to the taxable cost basis for the NUA shares. This would have eliminated the current tax on the cost basis, but preserved the NUA of 25k.
  • If the plan administrator is firm on this, the 60 day rollover option still applies to the shares. and they can be rolled into the Roth IRA tax free. The total going to the Roth would be 90k. This may actually be the best outcome of all, since a taxable cost basis for NUA shares of over 50% is not particularly appealing and would have resulted in 35k of taxable income in a year where the taxpayer may already have been working for a large part of the year. This also would facilitate immediate diversification out of the employer stock.

Submitted by Glenn Wager on Wed, 2015-09-16 17:29

Alan – Thanks for your response.  Yes the request was clear.  We called to question the breakdown and, after listneing to the recording of the call, the supervisor that we spoke to agreed that what was done was not what was requested.  However, after he escalated the issue to his supervisor, he was told that the treatment was correct given the after tax contributions.   You state that “it appears Notice 2014-54 allows the taxpayer to specify where the after tax contributions will be allocated even when two direct rollovers are done and one distribution (NUA shares).” Can we force the issue or is it at thier discretion?  I will not bore you with the details, but even thought the NUA was only 25K, it made sense to take the stock in kind and pay the tax on the 35K in 2015.  Ultimately the cleint will end up paying more tax the way the transaction was processed. We are going to make one more attempt to get the trustee to change the breakdown, but at this point I am guessing that it is unlikely.  If that’s the case, we plan on rolling as much over tothe Roth as possible (so the full 90K).  Can we rollover cash in lieu of the shares or do we have to move the shares to the Roth?Thanks again for your help.Glenn 

Submitted by Alan - IRA critic on Wed, 2015-09-16 21:01

  • You can either transfer the shares into the Roth or sell the shares and transfer the proceeds from the sale to the Roth or a combination of these two. The taxpayer cannot keep the shares and roll over new cash to the IRA. If the shares are sold and the proceeds rolled over, no gain or loss is recognized (Sch D), but the if the shares have gained since the distribution, then more than 90k in value will be rolled into the Roth but this would simply be reported on line 16a and 16b of Form 1040 as a rollover of the 90k distribution.
  • It is possible that a plan provision might specify that after tax contributions are assigned first to the cost basis of NUA shares and then to the NUA amount as well before assigning any excess to other assets. But in absence of such a provision, I don’t see why the plan would have to assign any of the after tax contributions to these shares.
  • This distribution not only reflects an undesirable basis allocation calculation, it also has changed the gross amount rolled to the TIRA from 650k to 710k and to the Roth IRA from 90k to 30k. This might have been done to prevent 60k of pre tax dollars from going to the Roth IRA as taxable income due to assignment of 60k of after tax contributions to the stock. It appears that they understood the consequences of their after tax allocations and made this adjustment to prevent the outcome from being even worse. Due to the added taxes, there is no reason to push for a revision unless they are willing to assign the entire 90k of after tax contributions to the Roth IRA. leaving 60k of pre tax (cost basis plus NUA) to the stock.
  • Again, rolling the shares or the proceeds from a share sale into the Roth IRA will result in 90k total in the Roth tax free. But the NUA treatment is forfeited with the result that 35k of current taxable income is eliminated, LTCG on 25k is eliminated and  deferred ordinary income tax on the 60k additional in the TIRA is substituted. The net result is 25k will be taxed at a higher rate but later as RMDs from the TIRA are distributed.
  • Is the reason for the share distribution request because 60 k is needed very soon from the total 800k?
  • Possibly, if the share distribution was requested first as a separate distribution (direct rollovers done later), the plan might have pro rated the after tax and pre tax amounts. The result might have been around 6750 of after tax contributions assigned to the shares, reducing the taxable amount to 28,250. The NUA would have been pre tax and the LTCG rate preserved on 25k. Then the direct rollovers could have followed, but with 83,250 going to the Roth (remainder of after tax amount) and 656,750 to the TIRA.

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