401k Lump Sum Distribution (LSD) using NUA after taking several RMDs

Submitted by Larry Hugo on Wed, 2020-02-19 03:07

1. Can I take a Lump Sum Distribution (LSD) (Total) from my Company 401k Retirement Plan after having taken several RMDs in the past from it (I’m older than 70 1/2 and left company several years ago) and still qualify for using the NUA special tax treatment for my company’s stock?
2. Does the LSD have to be within a certain time frame after 59 1/2 or leaving company? IRS Topic 412 only says “after” those events and “…within a single tax year…”. NOT a single tax year after…. an event.
3. Does “within a single tax year” mean a total distribution all in one tax year or within a tax year of the event? i.e. up to a tax year after 59 1/2 or retiring. Or no multiple NUAs in more than one tax year?

Cost basis is near 30% which seems like a good thing to do. I hope I still qualify. Company published info is not clear. But company says I cannot do it since I have taken an RMD prior. IRS topic seems to show eligibility if you do the LSD all in a single calendar or tax year.

I see an article showing how to take a distribution of RMD and NUA in first RMD year which implies for that you can only do this in the first year that you take your first RMD. I hope this is separate and not applicable if you’re not doing RMD and NUA together. Thanks for any help.



Submitted by Alan - IRA critic on Wed, 2020-02-19 14:11

  • Unfortunately, the company is correct. Because you took distributions in year prior to your potential LSD year and after turning 59.5, those distributions are considered “intervening distributions” even though they are RMDs. As such you can no longer do a qualified LSD for NUA purposes. Your last chance was doing the LSD in the year you took your first RMD. The IRS should improve the explanation of LSDs in Pub 575 to clarify the “intervening distributions” situation.
  • If the cost basis was attractive enough, you could still leave the shares in the plan (if the plan permitted) and your beneficiary could still do an LSD using your death as a new triggering event. However, 30% cost basis is probably not attractive enough to warrant that in most cases. Of course, if the stock gains in the future, that cost basis % would drop. 
  • Unless there is some unique situation, you are probably better off to just roll the shares and the rest of the plan into an IRA (no current taxes) and then sell at least some of the shares to improve your diversification. 

Submitted by Larry Hugo on Thu, 2020-02-20 21:19

Thank you for your response.(1) In your second sentence… I don’t understand how or where  “intervening distributions” (my RMDs) are defined by the IRS or… “why” they disqualify me from doing a (qualified) LSD for NUA purposes? Can you please explain?(2) IRS topic No. 412 basically says… take all (remaining) funds out “within a single tax year”. That is don’t cross tax years for the stock and NUA. I have never taken any “company stock” out in my RMDs. Nothing that I see says take all out “inside of or within one year of retiring and reaching 59 1/2. Can you explain how you know this please?(3) I also don’t know how to navigate thru Pub 575 to see anything related. Does it talk about “intervening distributions” somewhere? I don’t know where. Can you please explain? Thank you again.

Submitted by Randolph Roeder on Thu, 2020-02-20 22:45

I have two substantial IRAs that will pass to my wife upon my death.  We are both 75.  I started taking my RMDs in 2015. If I die this year (2020), my wife will have the right to stretch her RMDs for my two IRAs over her lifetime.  If she does so, she will have hardly exhausted the amount of the money in the IRAs if she dies in 11 years, in 2031. Upon my wife’s death, the IRAs will pass to our son, who is now 43.  My understanding of the new rule under the Secure Act is that, non-spousal beneficiaries have to take distributions from inherited IRAs within 10 years of the death of the original account-holder.  This indicates to me that, assuming I die in 2020, our son will not have the right in 2031 to extend the time at all for taking RMDs.  Instead, he will have to take a complete distribution of the IRAs in a lump sum, which could exceed $5 million dollars.  The tax bite on that will be substantial. If the foregoing is correct, would it be wiser for my wife, when she inherits my two IRAs, to start taking RMDs each year equal to 10% of the total value of my IRAs, thereby distributing everything in them within 10 years?

Submitted by Alan - IRA critic on Fri, 2020-02-21 01:12

  • When your wife inherits your IRA, she should immediately elect to assume ownership of your IRAs, after which her RMDs will be the same as your would have been since you are the same age. When she passes and has named your son as her beneficiary, he will be subject to the 10 year rule, which starts 1/1 after the year your wife passed. To control taxes, he would probably distribute equal amounts over the 10 year period (perhaps 11 tax years) to keep his marginal rate under control. 
  • Now suppose your wife fails to elect ownership and continues as beneficiary subject to the higher beneficiary RMDs of Table I. She is an “eligible beneficiary” so gets her single life expectancy stretch of 14 years, much shorter than if she had elected ownership. If she passes in 2031 and your son inherited, he would get a new 10 year rule period to drain the account, that ends in 2041. That’s longer than he would have had under the old rules where he would have had to drain it when your wife would have had to, ie 2034. If she elects ownership, when she passes son still only has 10 years more, but he would inherit much more because as owner your wife would have taken out much less than if she continued as beneficiary. 
  • Main points – be sure she elects ownership right after you pass AND your son will get 10 years of his own once he inherits.

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