NUA Treatment Post 86 and Pre 87

Submitted by Clark Bixler on Tue, 2017-03-14 16:57

Hi, I have a client who is 63 that has highly appreciated company stock in their 401k program. $98k is considered “after tax” $203k 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?



Submitted by Alan - IRA critic on Tue, 2017-03-14 18:20

  • If the 98k is not assigned to specific shares of employer stock, it can be directly rolled to a Roth IRA whether it is pre 87 or post 86 after tax contribution money. If it IS assigned to employer shares, then those shares can still be rolled to a Roth IRA tax free and then sold in the Roth. NUA would not apply to these shares.
  • It does not matter whether employer shares were purchased with elective deferrals or were awarded as matching contributions. If NUA cost basis is 233k and the FMV is 688k, then NUA must be 455k. The cost basis is 34% of the FMV which is on the high side. Does client need the much of the 688k in the next couple years?  If so, paying LT cap gain on the 455k will be less than paying ordinary income tax on IRA distributions. But if client intends to hold on to these shares for years, there will be a tax benefit in the end, but at a cost of being poorly diversified for years (remember Enron, Worldcom, Lehmans Bros) and having paid ordinary income on 233k up front. Would be nice to have a calculator to crunch the numbers…


Submitted by Clark Bixler on Thu, 2017-03-16 15:41

The client doesnt really need any of the distribution now.  Between SS and Pension, the fixed income from those two resources would cover their monthly/annual needs.  Therefore the qualified money could continue to deffer until 70 1/2 and likley benefit from diversification and asset allocation (given current share price at near all time high.)  Therefore, I’m getting from you, that if they don’t need the money, excercising NUA wouldnt necessarily be all that useful. Also, I was told that if the client wanted to or needed cash, they could simply take a distribution from the post tax portion (without tax) and roll any remainder into a ROTH.  I assume that’s accurate?



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