NUA Distribution Deposited into Traditional IRA Account
My wife had employer securities in her previous employer’s 401k plan.
When we went to move these securities out of the 401k, we inadvertently chose the NUA option.
Realizing our mistake, we immediately deposited the money into a Traditional IRA account.
We now have a 1099-R from the 401k custodian showing most of the distribution as taxable as well as Distribution Code 1 (early distribution with no known exceptions) in Box 7, which would lead us to have to pay a 10% penalty on the distribution.
However, since we immediately deposited the distribution in a Traditional IRA account, we are hoping this can qualify as an indirect rollover versus an NUA distribution.
Any insight on if we can claim this as an indirect rollover and, if so, how we can do this when filing our tax return given the information on the 1099-R would be greatly appreciated.
Thank you,
John
Permalink Submitted by Alan - IRA critic on Thu, 2017-01-26 16:55
Yes, she can abort NUA treatment by doing an indirect rollover within 60 days. The Box 1 amount on the 1099R would be entered on line 16, 0 on 16b with “rollover” next to 16b. An explanatory statement should also be made because the IRS does not see this very often. Obviously, the 1099R cannot be entered as is in a tax program when the alternate treatment is chosen. When and if the shares are sold is also a special reporting situation. Have the shares been sold, and if so at what point in this process?
Permalink Submitted by John Witt on Thu, 2017-01-26 17:33
Alan,thank you for the helpful information. The shares have not been sold. If we liquidate the shares in the future, for example at retirement, what special reporting will be required? Thanks, John
Permalink Submitted by Alan - IRA critic on Thu, 2017-01-26 17:58
If the shares were transferred in kind to the IRA, they can be sold in the IRA at any time to improve diversification without any tax considerations. NUA is completely forfeited once shares are rolled into an IRA, and they are treated just like any other investment in the IRA. Any distributions from the IRA are taxed as ordinary income, and there is no special tax reporting required other than reporting the rollover into the IRA itself.
Permalink Submitted by John Witt on Thu, 2017-01-26 18:33
Alan, thank you for your help with this complicated situation. – John