NUA Taxation
I have client who I was doing an NUA 401K rollover. The administrator is Empower and the stock is Lockheed Martin. We did the paperwork correctly and the monies got moved into a Trad IRA and Empower sent the stock to Computershare which I guess is the way they process NUA’s. This was all done in Dec however, the stock is still at Computershare and I want to make sure that transferring it into a NQL account in 2021 will not negate the NUA tax treatment. I researched and found out that it is recommended not to try and do an NUA at the end of the year, however, my understanding is that Empower did do the transaction as an NUA transaction. Are we still okay to finalize the stock movement at this time? Please let me know if you need any more information. Thank you – Pat
Permalink Submitted by Alan - IRA critic on Wed, 2021-01-06 23:25
Computershare performs multiple services, however in this case they are probably acting as the transfer agent, will reregister the shares to the client individually and complete the transfer to client’s brokerage account. I am not sure whether the actual distribution that triggers the 1099R showing NUA (or not) is when the shares leave the plan or when they leave the transfer agent. But if you still have the opportunity to confirm the stock distribution, that suggests it has not been distributed. To be sure, call Empower and ask which year the 1099R will be for and if it will include the NUA in Box 6.
Yes, a lump sum distribution should generally not be attempted around year end because some of them take considerable time. The main concern here is that the 1099R reporting distribution of the other assets to the TIRA would be “intervening distribution” for NUA purposes, since it occurred in a year prior to the LSD year and after the triggering event. That would mean that the LSD is actually completed in 2021 and the 1099R for 2021 will not meet the requirements of a qualified LSD for NUA because of the 2020 intervening distribution.
If NUA in 2020 is forfeited, the client can still complete a 60 day rollover of the shares to their IRA account and defer any taxes, including income from the cost basis. The end result is the same as if client ignored NUA from the start, but client needs to get this done within the 60 day period starting with the date they have constructive receipt of the shares. Being shares, there should be no withholding to deal with in completing the rollover, which will also be reported on the return for the year for which the 1099R is issued for the share distribution.
Now suppose the shares are not yet distributed from the plan. If that’s the case, and if client has another triggering event soon, they can retain NUA for use after the next triggering event if the shares do not leave the plan. Triggering events include separation from service, reaching 59.5, or death. If the triggering event for this LSD was separation and client is still under 59.5, another triggering event will occur soon and reinstate the potential to utilize NUA.