NUA Distribution Timing at Retirement

Submitted by Janice McGunnigle on Fri, 2020-10-09 22:42

If you were to retire on November 15, 2020 is it correct to assume you can initiate the 401(k) distributions (brokerage account for the stock and rollover to IRA for remaining balance) on January 1, 2021 to allow for a full tax year to zero out the 401(k) balance? Or does the 401(k) need to have a zero balance on December 31, 2020 to take advantage of NUA?

Thanks for any feedback people have.



Submitted by Alan - IRA critic on Sat, 2020-10-10 00:09

  • A qualified LSD for NUA purposes requires that the entire account (and like accounts for that taxpayer) be reduced to a 0 balance by the end of the year that the shares are distributed. Therefore, if the shares are distributed this year. the entire balance must be distributed this year. If the shares are distributed next year, then the entire balance must be distributed next year. If the person does not wish to have the taxable cost basis of the shares included in 2020 income after working most of the year, then the LSD must be postponed to some future year. If postoned to a future year, no partial distributions should be taken from the plan until the future LSD year (known as intervening distributions), since intervening distributions after the triggering event before the LSD year will erase the triggering event (separation from service), and require a new triggering event. Reaching 59.5 would be a new triggering event if you retired before 59.5, otherwise the next triggering event after separation from service would be death, and then the beneficiary would inherit the NUA potential.
  • In summary, NUA can be postponed to any future year as long as intervening distributions are avoided. 
  • Starting the LSD process after 11/15 means there is limited time to complete a total LSD for the plan and therefore considerable time pressure to complete the distribution and accompanying direct rollover of the non employer stock portions of the plan.

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