NUA

Submitted by Warren DeNardo on Wed, 2017-03-15 18:58

Client reached 70.5 in 2016. Considering taking a total distribution of his 401k in 2017.
1. taking both 2016 and 2017 RMD in 2017
2. rolling over nontaxable after-tax money to a ROTH and remaining taxable amounts to a traditional IRA.
3. Distributing company stock in shares to a brokerage account to take advantage of NUA.

Total NTC (nontaxable credit) $50000
Total stock cost basis $140000
RMDs total for 2016-2017 $ 160000
Stock value $500000
Remaining account value $1,500,000.

It seems the plan is “ordering” how the money comes out. First dollars out are the RMD which precludes his use of the basis in the stock, for RMD purposes.

If he just cashes out the 401k, and utilizes NUA to fulfill his RMD requirements, and rolls over the non-taxable amounts to a ROTH, and finishes off the whole process by rolling over the remaining amounts to an IRA, how is he tripped up?

Is the 401k provider potentially, reporting things in such a way that he is precluded from doing as he chooses in this matter? Or as long as he can document what he has done, he is in good standing with the IRS provisions.
Thank you,
Warren



Submitted by Alan - IRA critic on Wed, 2017-03-15 21:48

  • Both the cost basis of the NUA shares AND the NUA itself count toward the 2016 and 2017 RMDs. The stock distribution needs to be done first or no later than simultaneously with the rest of the plan in order for the shares to cover the RMD. It was good planning to avoid taking a plan distribution in 2016 in order to have the LSD cover two RMD years. Again, the first distribution being RMD is an IRS rule, not a plan rule. However, the application of after tax contributions  (50,000) are subject to plan allocation rules. It is beneficial if the after tax balance can be directly rolled to a Roth IRA tax free, but this should not be done before the distribution of shares.
  • If he cashes out the 401k entirely and then does 60 day rollovers the pre tax dollars are deemed to be rolled over first. One problem with this plan is that mandatory 20% withholding will apply to the pre tax balance excluding the employer stock which is also the RMD money. It may not be predictable how the plan combines RMD dollars with company shares, but at the end of the day client may have to come up with other money to replace any withholding so the rollovers can be completed. Other than this withholding an indirect rollover gives him better control of the process and the order of how things are done. He would get just one 1099R for the entire distribution showing a combined taxable amount, the 50,000 in Box 5 and the NUA amount in Box 6. The taxable box 2a would equal Box 1 less box 5 and 6. So the question is whether the added control of not using direct rollovers is worth the withholding he would not otherwise have. Probably not due to the large withholding he would have to replace.


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