NUA

Submitted by Kevin Dempsey on Thu, 2018-10-11 13:47

Have never done this before…. What are the steps to execute a NUA strategy from a 401(k) plan? How the does stock get rolled over into a brokerage account and is it done first? Then after the stock leaves rollover the balance to an IRA? Are there instances where the NUA strategy is not advantageous?



Submitted by Alan - IRA critic on Thu, 2018-10-11 17:36

  • It is generally not an advantage if the taxable cost basis is over 25% of the FMV, unless the person needs to cash in these funds for immediate expenses, since in that situation they would pay full ordinary income taxes on the entire distribution plus a possible early distribution penalty if they did not execute NUA. With NUA the taxes would be at the lower LTCG rate for the amount of NUA, and the penalty would never apply to the NUA sale proceeds.
  • A qualified LSD is required in which the entire balance of the plan and similar plans of the employer is distributed in a single calendar year. It does not matter if the NUA shares are distributed at a different time than the rest of the plan balance as long as it is all complete by year end.  The taxpayer must also avoid “intervening distributions” after a triggering event. For example, if the triggering event is separation from service after age 59.5, a partial distribution from the plan in a year after the separation but before the year of the LSD will prevent that LSD from being qualified for NUA. 
  • Taxpayers should first make sure that NUA is viable. They should get a quote of what the cost basis per share is. If it is low enough to make NUA beneficial, they would usually request that the shares  (or part of them) be distributed to a taxable brokerage account, and at the same time the rest of the plan goes to a rollover IRA in a direct rollover. If taxpayer has made after tax contributions to the plan, that balance is usually subtracted from the taxable cost basis. Note that after tax contributions are an entirely different issue than the cost basis for NUA purposes.

Add new comment

Log in or register to post comments