NUA Treatment Post 86 and Pre 87
Hi, I have a client who is 63 that has highly appreciated company stock in their 401k program. $98k is considered “after tax” $241k is considered “pre-tax” and $384k is considered “employer match.” Total cost basis is $233k and total stock value is $688k.
Couple of questions: Does the client have the option to take the $98k of “after tax” stock in cash for liquidity (with little to no tax consequences) or roll that into a Roth IRA?
If the clients tax bracket is low (25%) would it make sense to excercise NUA on the pre tax option?
If the client ultimately wants to diversify and not owe large tax on cost basis, would it just make sense to rollover the pretax and post tax money’s into Roth and Trad IRA’s?
Thanks
Permalink Submitted by Alan - IRA critic on Mon, 2017-03-13 22:09
These numbers do not add up right. The values should not include any other parts of the plan, just the employer stock shares. If those shares have a total value of 688k, then NUA plus taxable cost basis plus after tax cost basis should total to 688k. If after tax contributions to the plan were made, is that total being assigned by plan accounting to employer shares or is some it assigned to other parts of the plan. I think if the NUA portion of the company shares are only about 2/3 of market value, any after tax contributions to the plan should be rolled to a Roth IRA per Notice 2014-54. Then remaining company shares can either just be rolled to an IRA avoiding NUA or used for NUA. The answer to your last question is probably Yes, resulting in passing on NUA treatment but getting the after tax contributions into a Roth IRA. SInce 2014-54 there is no need to separate pre 87 after tax contributions from post 86 after tax contributions, as both can be isolated together for rollover purposes.
Permalink Submitted by Clark Bixler on Mon, 2017-03-13 22:42
$38k is in a pre-tax target date fund inside the 401k.
Permalink Submitted by Clark Bixler on Mon, 2017-03-13 22:44
therefore the total pretax company stock portion is $203k.
Permalink Submitted by Steve Hagedorn on Tue, 2017-03-14 17:07
Investopedia discusses this topic here:http://www.investopedia.com/articles/retirement/05/062305.asp
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-14 18:06
Good article in general, but it does not go into the subject of how 401k plan accounting rules may affect NUA when after tax contributions have been made to the plan. After tax contribution basis is totally different than NUA cost basis and it is confusing when both apply to the same dollars. The main decision here is whether to use after tax contributions in the plan to reduce the taxable cost basis in Box 2a of the 1099R, OR to roll the after tax contribution amount to a Roth IRA tax free. These dollars cannot be used for both purposes. Further, plan accounting rules may have an affect as well. Generally, after tax contributions are not assigned specifically to certain shares of stock, but might be assigned as a total amount to all employer shares, or to other portions of the plan in addition to employer shares. The real question is whether the participant is able to use the after tax contributions however they want and this is subject to plan accounting rules. I think the best way to communicate these questions is to mock up the 1099R for the employer shares as you wish it to be issued and seek agreement from the plan to that mock up. The IRS will be guided by the 1099R.