Is NUA using only after tax funds counted towards RMD?

I am planning to do 401K LSD. My after tax balance in 401K exceeds the first year RMD. If I use NUA only to the extent of my after tax money in 401K and obviously pay no income taxes on it… would it count as my first year RMD?



 Yes. The following IRS Reg 1.401(a)(9)-5, Q 9 is very clear on this point:

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?A-9. (a) General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

Note that basis from your after tax contributions may or may not be applied to the employer shares by the plan provisions. If applied, they would be applied only to the cost basis, not to the NUA per share. You might have a high enough amount to eliminate the taxable cost basis, but would still have the NUA per share to be taxed later when you sell the shares. Some people would rather have the after tax contributions isolated per Notice 2014-54 and directly rolled to a Roth IRA, but pay tax on the NUA cost basis. Having the after tax balance converted to a Roth IRA tax free is a one time opportunity when direct rollovers are done, so you have a decision to make once you determine your options under the plan. Having after tax contributions along with highly appreciated employer shares in the plan presents a complex planning opportunity.



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