NUA and rules

Submitted by Alex Albacarys on Mon, 2018-03-12 16:03

Hello-

My wife and i are retiring at the same time – june 30 of 2018. I will be 55 in november ’18 and she will be 55 in July ’19. We have profit sharing accounts with very low cost basis company stock. So if i understand the rules correctly, we can take a LSD of the low cost basis company stock, pay the taxes on the NUA and then hold on to it for more than a year, and pay LT gains on it. As part of the LSD, i would need to direct the remaining assets into an IRA and then the normal IRA rules kick in (all withdrawals are taxable as ordinary income, RMD, etc.) My questions are as follows:

1) given i turn 55 later this year, am i subject to the 10% early widhdrawal penalty? I think not, as the rules say ‘if i retire in the year i turn 55’ this penalty does not apply. Also, if the penalty does apply, it is on the same NUA value, correct? not the market value?
2) since my wife is retiring at 53, (a week before turning 54), is the only way to avoid the penalty to wait until 59.5, or if she waits until she turns 55, does she avoid the tax on the NUA stock?

many thanks for your help!

alby



Submitted by Alan - IRA critic on Mon, 2018-03-12 16:20

  • Some misconceptions there. For the LSD year, you will pay ordinary income taxes on the cost basis of the shares. The NUA is only taxable when the shares are sold, which could be at anytime. If you sell in the first year, the NUA is taxed at the LT cap gain rate and any additional gains after distribution will be taxed at the ST cap gain rate. After a year, both the NUA and any additional gains are both taxed at the LT rate. You should provide your broker with the cost basis per share and indicate that the shares include NUA. While each spouse’s LSD must be handled separately, it is OK for the company shares to be transferred into a joint brokerage account.
  • Q 1 – you are correct that you will not owe a 10% penalty on the cost basis of the shares due to the age 55 separation exception. No penalty on the rest of the value either.
  • Q 2 – your wife would owe the 10% penalty on only the cost basis. Her 1099R should be coded 1, early distribution. If the cost basis is very low, the penalty will not amount to much. Otherwise, to avoid the penalty she would have to delay the LSD until reaching 59.5, and will never be eligible for the age 55 exception.
  • You can sell these shares at anytime. In any cases where there is enough value in these shares to cause diversification risks, selling some or the shares sooner rather than later is wise, since diversification is more important than tax benefits.

Submitted by Alex Albacarys on Mon, 2018-03-12 23:52

Thanks so much for the quick reply!   I did mean cost basis (not NUA) in my question regarding the LSD.    was not aware that we uld co-mingle funds in the brokerage account- that would simplfy recrod keeping, since the cost basis is the same for all the shares. thanks again, alby

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