NUA for stock in 401k
Trying to understand this a little better:
My client has stock in his 401k worth 185-190k (it bounces back and forth)
cost basis it: 32,571.92
The percentage is approx. 20-21% ($32,571.92 divided by 185-190K)
a. is this worth doing a NUA?
b. If he did it, they would transfer the stock to a individual brokerage account, correct?
c. The $32,571.92 cost basis would be added to his bottom line income and he would pay tax on total income (minus deductions, etc), correct?
d. then he would be taxed on the stock when he sold it, correct?
e. when he sells the stock and its at $191k, do you minus the $32k cost basis and then the $159k is taxed as capital gains rate of 15%, correct?
Thank you for any assistance
Douglas
Permalink Submitted by Alan - IRA critic on Tue, 2021-06-08 18:59
I get an estimated cost basis close to 17%, which can be attractive for NUA utilization.
Yes, NUA shares would be distributed to a brokerage account without withholding.
Yes, the cost basis would appear in Box 2a of the 1099R and is subject to ordinary income for the year of the LSD. It would also be subject to 10% penalty if under 59.5 and taxpayer did not meet the separation from service at 55 or later exception.
When shares are sold, the NUA is taxed at the LT cap gain rate. Any additional gain on shares sold in the first year would be taxable at the ordinary income rate, then LT after the first year.
Your e) is correct. The taxpayer must be sure to complete a qualified LSD of all similar plans in the same year to receive a 1099R indicating cost basis in 2a and NUA in Box 6.
Permalink Submitted by Ron Corcoran on Sat, 2021-06-12 18:26
I recently did this and missed out on dividends within the 401k because I had to be “in the plan” on pay date. I also will pay ordinary income tax on dividends paid by brokerage account because I hadn’t yet met the requirements for ownership of this recently purchased stock to get “qualified” dividends. FYI – ALL dividends will be a taxable event from this point on .. even if re-invested (which was not recommended on this site).