NUA, CB, DIV, & Tax
My 401k was moved to brokerage account. If I sell/trade (realize gain) I’d pay LT capital gains tax on NUA but not the CB (cost basis), since I already paid ordinary income tax on that, so.. if CB equals 10% of stock value and only 5% was “realized” would my CB count first (tax free) OR would all realizations be taxed at 90%. I assume subsequent gains are kept separate since they’re not yet eligible for LT capital gains, and might complicate this example.
I believe DIVs are not immediately “qualified” and holding period rules apply. I’ve read in this forum that it’s better to NOT reinvest DIV to avoid complicating the CB per share. Is this is correct, please elaborate.
Lastly, I emptied my 401k but afraid I may receive an “in-plan dividend” because I was “in” on ex-div date ?
(if so, I’d have to empty it again)
Permalink Submitted by Alan - IRA critic on Tue, 2021-02-23 16:14
AS long as your 1099R from the 401k shows a “total distribution”, you are OK but best to do the lump sum distribution no later than mid October to avoid trailing dividends paid in the following year. The sale of NUA shares are considered to all have a cost basis per share, so while the NUA per share can fluctuate, the cost basis does not. If you recovered half of your cost basis, that means you sold half your NUA shares. Attempts to supply the cost basis to brokerages sometimes fails resulting in a flawed 1099B, and then it is necessary to make an adjustment of the cost basis and holding period on Form 8949 before filing. You also may need to improvise on the 8949 if you sell in the first year and have ST gains in the same shares in which you have NUA LT gains. The IRS has not provided a suggested format for doing this, therefore some tax prepares probably use various methods on the 8949. Declining dividend reinvestment after distribution will eliminate the question of which shares you are selling, and also helps somewhat with avoiding diversification problems.