NUA with after tax contributions

Submitted by Renee Grey on Wed, 2021-05-26 18:36

Hello, Looking at utilizing the NUA strategy. Within this 401k is approx 43% after-tax ($385k), with the rest in pre-tax ($130k) and employer match (375k).
1) Was told by the plan administrator that the cost basis on the stock is $97k. Although I need to call back and confirm how much may be attributed to after tax contributions.
2) Current stock value within 401k plan is $190,000.
3) If there is stock purchased with after-tax dollars, is there anything additional to consider with regards to the NUA strategy? I would assume that any after-tax purchase on the cost basis would not be subject to tax and rolls over to the brokerage with the pre-tax shares. (But I hate to assume, hence the question).
4) As for tax reporting, when the 1099 is issued does it just say that the ‘taxable amount not determined’? I’d suspect that some type of statement would need to be provided to show the amount of taxable cost basis.

Thanks in Advance!



Submitted by Renee Grey on Fri, 2021-05-28 13:57

Bumping to see if I can get a taker on this question.  Are there any special rules or circumstances to consider for an NUA transaction where the stock was purchased within the 401k with after-tax dollars?

Submitted by Alan - IRA critic on Fri, 2021-05-28 16:13

This is a matter of plan accounting options. The plan may automatically apply after tax contributions to reduce the taxable cost basis (Box 2a of 1099R) on the distribution of employer shares, or may give you a choice of whether to apply all of the after tax contribution balance to other assets, after which you could do a split rollover to TIRA and Roth IRA (of the after tax amount), but not have the cost basis reduced for the employer shares. Eliminating the NUA from consideration is recommended unless you need this money for current spending, since a cost basis of over 50% is not attractive for NUA. This also would allow for a larger total amount to be rolled into your Roth IRA tax free. For the split rollover, be sure to make the two rollover requests at the same time.
If NUA is still elected and you meet the LSD requirements, the plan must issue a 1099R showing the taxable amount in 2a and the NUA in Box 6. It would not show the taxable amount as not determined.

Submitted by Renee Grey on Fri, 2021-05-28 16:58

Thank you for your reponse and the extra food for thought.  Just curious as to the ‘cost basis over 50%’ rule and why that may be?  The account owner recently retired at age 60 and this will be an ultra low income year for him (12% bracket). Was looking at the NUA to use up some of the low tax bracket and remove assets from future RMDs (it’s unlikely he’ll need withdrawals prior to 72, so lots of potential for future growth and larger RMDs).

Submitted by Alan - IRA critic on Fri, 2021-05-28 17:12

There is no rule, just a general guideline that may not apply to some. In this case, if the taxable cost basis of 97k will be taxed at a lower rate than expected in retirement from RMDs, it may be worthwhile, but it depends on how high the rate in retirement is expected to be compared to the marginal rate on the 97k.  The following article analyzes this decision in detail.
401(k) Net Unrealized Appreciation (NUA) Rules And Caveats (kitces.com)

Submitted by Renee Grey on Fri, 2021-05-28 21:15

There’s a comment in the link that begs another question…the comment says, “If you have a defined benefit pension and a 401(k), does the lump sum distribution requirement (which, I understand means that you must fully distribute all qualified plans of the same type in a single year) mean you cannot qualify for NUA treatment on the company stock in the 401(k) plan unless you also take early distribution (i.e., liquidate) the pension in the same year as the 401(k)? In other words, for purpose of the lump sum distribution requirement, is a 401(k) plan considered to be the same type of qualified plan as a defined benefit pension plan?”  I just want to clarify that the pension from the same employer would not need to be liquidated in order to implement the NUA strategy for the stock held in the 401k, correct?

Submitted by Alan - IRA critic on Fri, 2021-05-28 22:00

A DB pension is not considered to be “a similar plan” to a 401k, but an ESOP is. Therefore, the DB plan can be ignored, even if it is a cash value plan.

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