60 day rule applied to NUA

Submitted by Adrienne Calomino on Sat, 2019-03-02 00:37

I waited to do an NUA on a qualified 401K account when I retired.
The account administrator gave me incorrect cost basis information.

They have produced the distribution showing a “Taxable basis” of $10,000 more then quoted to me.

Do to the change in tax laws this places me in a much higher tax bracket and I would not have originally done the NUA on all the shares. They claim my only recourse is to use the 60 day rollover rule to avoid paying taxes on tis incremental $10,000.

I am looking for ideas on how to do this. Also the NUA was done on some shares at a very low cost basis and some at a higher cost basis. Od course, I would want to roll over the higher cost basis share.



Submitted by Alan - IRA critic on Sat, 2019-03-02 01:47

  • Are you still within 60 days of receiving the shares?  If not, due to the plan error you could use the IRS self certification process to attain an extension of the 60 day rollover period per Rev Proc 2016-47.
  • If there were any after tax contributions applied to the employer shares, please advise.
  • You should have some documentation that the plan accounting for these shares was not an average cost, but based on other considerations such as certain lots of stock. You should get something in writing from the plan that you received x shares with a cost basis of “a” and y shares with a cost basis of “b”. Advise your broker of this and indicate that you wish to sell (or roll over) the higher cost basis shares. Hopefully, the broker will understand the issues. You will simplify your Sch D reporting if you roll over the shares and sell them in your IRA for diversification reasons.
  • If you roll over the higher cost shares you are rolling over both the cost basis and the NUA applied to the specific higher cost basis shares. You would report a rollover on line 4a and 4b of Form 1040 with only the cost basis of the retained shares on 4b. Of course, G coded 1099R for the rest of the LSD must also be reported on 4a and 4b as usual. 

Submitted by Adrienne Calomino on Sat, 2019-03-02 02:35

Yes I am still within the 60 days. I do not wish to sell the stock just lower my taxes due for 2019.The brokerage firm did send me a distribution statement with the cost basis.But where I am confused is do I ask the broker to roll x number of shares to the IRA account or a dollar amount?The broker said they will not redo a 1099R but report all the shares od the original NUA.They say its my problem with the IRS to explain I excercised the 60 day roll over of some of the shares.I cannot find a local tax person that unsrstans this to advise me.

Submitted by Alan - IRA critic on Sat, 2019-03-02 04:28

Not a surprise about the preparer issues with NUA, but the rollover further complicates things, as a partial rollover of NUA shares is very rare. The plan administrator is correct, they must report the full distribution, and it is up to you to report the rollover. Since you wish to reduce your taxable income from the cost basis to a certain figure, if you know how many shares carry the highest cost basis per share, you would determine how many shares to roll over to the IRA and the cost basis of those shares will reduce the Box 2a amount on your 1099R. Do you have the breakdown of the number of shares at each different cost basis? You would need that breakdown to report the distribution, to determine how many shares to roll over and to advise the broker of the cost basis of the remaining shares for future reporting on Form 8949 to determine the cap gain when you sell the shares you kept in the taxable brokerage. You would also need that breakdown in the event the IRS is totally confused and sends you an inquiry down the road.

Submitted by Adrienne Calomino on Sat, 2019-03-02 11:53

First of all thank you for your help.So if I understand for example if i want to reduce my taxable amount by $10000, and the basis was 50 per share, then I ask the institution to do an indirect rollover to an IRA of 200 shares. How do I make sure they use the higher cost basis shares?  They claim they will still report the NUA done on all the shares.  So I am still confused how I prove that I am rolling over the higher cost shares if the institution does not document it.Thanks again

Submitted by Alan - IRA critic on Sat, 2019-03-02 17:50

  • Not sure if what you have from the 401k plan clarifies that the plan accounting for the cost basis of the shares is separately assigned to your shares, rather than using average cost. That affects the number of shares to be rolled into the IRA in order to reduce your taxable cost basis (and your NUA) by your target such as 10,000. If you get that documentation, you would be rolling over fewer shares to get the cost basis down as compared to the number you would have to roll over if average cost was used.
  • Once you are ready to do the rollover, you need to explain to your broker what the cost basis is for the shares you LEFT with the broker (NUA shares). The broker should not be issuing a 1099B because you are not selling the shares you roll over to the IRA, you are just completing a 60 day rollover. The NUA shares left with the broker will hold a cost basis per share of the difference between the original distribution and the cost basis of the shares you are rolling over. This will only come into play when you eventually sell the NUA shares and the broker eventually issues a 1099B. But even if the broker misfires at that time with the cost basis they show on that 1099B, you can still override what they report on Form 8949.
  • While you could also sell the shares you plan to roll over and just roll over the cash proceeds, best to avoid that because the broker might issue a 1099B for 2019 that you would have to override because this is part of a rollover transaction. Therefore, for reporting purposes it is simpler to not sell the shares until they land in the IRA, and you can then sell them without any tax consequence or reporting.
  • “How do I make sure the institution actually rolls over the higher cost shares?”   – I suggest you discuss the situation with the broker and provide them with the breakdown  (again, you can’t do this if the 401k plan used average cost basis for the shares when distributed).  For example, 200 sh @ 50 per share, 100 sh @ 40 per share, 75 sh @ 32 per share etc. Then tell them that the shares you are rolling over are the 200 @ 50. Don’t waste your time discussing this with the average CSR, ask for their top resource for dealing with NUA shares. When the rollover to an IRA is done, you would report the 1099R received from the 401k as being partially rolled over, and the taxable amount in Box 2a will be reduced by 10,000. You should also include an explanatory statement with your return explaining to the IRS was you did to reduce the chance of an inquiry since they rarely see a rollover after a distribution of NUA shares. 
  •  If you find that the 401k uses average cost, and that average cost is too high as a % of the full share value to warrent using NUA at all, you could of course roll ALL the shares over. That would eliminate any taxable income in 2019 and would be much simpler in many respects. Before calling the broker, you should clarify with the 401k administrator that the cost basis of the shares distributed vary for certain lots of shares. There is no way to be sure that whatever documentation you collect from the 401k plan would be sufficient in the eyes of the IRS, but the chance of an IRS inquiry is probably quite low unless you are working with very large values. Following is a good article on NUA, which does briefly mention the partial rollover.
  • https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/

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