Qualifying Lump Sum Distributions and In Service Distributions

Submitted by Brian Devers on Mon, 2019-02-18 19:16

Client works for company , with a 401k plan that –
– permits Non Roth After Tax Contributions
– does NOT permit In Plan Roth Conversions
– permits In Service Distributions
– contributes company stock to the plan, which has appreciated over the years

The client is several years from retirement, we anticipate age 66.
The client is 63.
Client can make sizable after tax contributions.
We plan to do In Service Distributions periodically ( 2 or 3 times annually) of these After Tax contributions to his Roth IRA.
Will these periodic In Service Distributions prevent using the Net Unrealized Appreciation strategy when the client retires and rolls out his stock?

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Permalink Submitted by Alan - IRA critic on Mon, 2019-02-18 21:14

No. However, once he retires his separation from service is considered a triggering event for NUA. Once he has the triggering event, then any distributions from the plan before the year in which the qualified lump sum is done are treated as “intervening distributions” and will erase the NUA possibility until he has another triggering event. For example, if he retires at 55 he is eligible for NUA. But if he takes any distribution at 56 he is no longer eligible. So he waits until 59.5 which becomes a NEW triggering event and he can now utilize NUA again.
Therefore, if you assume that NUA will not be used until after retirement, an inservice distribution is never a problem because on the day of retirement the participant has a new triggering event. Conversely, any distribution after retirement has the potential to erase the NUA, particularly if the participant is already older than 59.5.
You can take a distribution earlier in the year in which the LSD is done and it is not treated as an intervening distribution since it is in the same year as the LSD.