I just want to verify I understand the details here.
Client is 60 years old. Still working (although currently on short term disability) and has a 401k with her current employer that has company stock in it. As long as the 401k end of year balance is 0, can she take advantage of NUA opportunities this year and then continue 401k contributions in 2021?
Yes, the majority of plans use an average cost basis for all stock purchases made for a 401k account including dividend reinvestments. That eliminates the ability for the participant to select which shares are sold in the plan or which shares are distributed as part of the LSD. However, if shares have been acquired over 30 years, the average holding time is still fairly long. Client should still secure the current average cost basis of the shares before making a decision.
Permalink Submitted by Alan - IRA critic on Thu, 2020-07-23 16:19
The IRS has never indicated how long the total distribution must be maintained, but as long as the 1099R shows the “total distribution” box checked, resuming elective deferrals in the following year should not cause a problem. That said, best to check with the plan administrator that resumption of deferrals next year will not result in the 1099R being corrected to eliminate the total distribution box indicator. I assume client has received a cost basis quote from the plan on the NUA shares and it is low enough to make NUA beneficial. Given the unstable economic situation we are in and the increased risks for various companies in certain sectors, owning heavy %s of a single stock is more risky than ever. Therefore, if client proceeds with NUA, they need to develop a plan on when to dispose of the shares and pay the cap gain tax.
Permalink Submitted by Richard Fritts on Wed, 2020-07-29 19:52
Thank you for the insight! The client has been with the company for close to 30 years so I imagined the cost basis vs current price would be substantial but after speaking with Fidelity, they are taking an average cost basis and not going back to look at different blocks of stock purchased at different times. Is this normal?