NUA and RMD at retirement

Submitted by abraham boznick on Wed, 2022-04-20 04:21

I have 401k plan with ESOP value around 1,000,000. The cost basis is very low at about 150,000. My 401k also has regular mutual fund investments at about 500,000. I also have other IRA accounts (outside 401k) at about 600,000. I have never touched my 401k yet. When I will turn 73 (next year after 72), I plan to close my 401k and use NUA technique in paying for 1st required RMD (by April of year I turn 73) and 2d required RMD (by end of year I turn 73). I understand that I need to do NUA first and then transfer remaining stuff from 401k to IRA (same year). As per above, my total required RMD (1st and 2d year) are less than NUA. In addition to using NUA to pay for RMD from 500,000 mutual funds that I had in 401k — can I ALSO use NUA to pay for RMD stemming from outside IRA accounts (600,000) , which were never part of 401k?
Assuming that I have no other income in the year when I turn 73 and do NUA — am I correct that my taxes will be based only 150,000 income from NUA cost basis — as combined RMD for 1st year and 2 year are less than 150k NUA cost basis.



Submitted by Alan - IRA critic on Wed, 2022-04-20 14:09

Your IRA RMD must be satisfied by an IRA distribution. You cannot mix and match IRA RMDs with other plans. Generally, your plan will work and the LSD can cover two years of RMDs, but upon consulting with your plan administrator, you may find that the plans require a single distribution, meaning that you would have to request both your first and second year RMDs at the same time, and you would probably start the request by early February, so that the first RMD is done by 4/1. In addition, an ESOP and a 401k are considered similar plan types, so if you have a balance in both with the same employer, you would have to complete a total distribution of both in the same year. If you have appreciated employer shares in both plans, they may have different cost bases %s. In any event, be sure to consult with your plan administrator because there are different ways to set up ESOP plans in conjunction with a 401k.
To be clear, for the company shares, both the cost basis and the NUA per share count toward the RMD, but you are only taxed on the cost basis of the shares in the LSD year if you do not sell any shares. 
Your LSD gets much more complicated if you have made any after tax contributions to your 401k, since you then need to determine your choices in applying the after tax contributions. For example, the after tax balance is usually used to reduce the taxable cost basis of the shares, but some plans will allow you to allocate after tax contributions to the non employer assets, and roll the after tax balance over to a Roth IRA tax free.
If the plan allows you to split your distributions, you will have to start the year 1 RMD distribution request early due to 4/1 deadline, but do not wait until too late in the year to complete the year 2 RMD and direct rollover of the non stock assets. I would request that by mid October to avoid any December late year issues in completing the LSD. If there are any assets still in these plans at year end, the entire strategy fails with respect to NUA.

Submitted by abraham boznick on Wed, 2022-04-20 23:18

Thank you Alan. Just a follow up — since my NUA is much higher than 1st and 2d RMD payment for what I have in 401k. Would it be possible for me to do a reverse transfer (before doing NUA distribution)  from my outside IRA account into 401k and then rely on my NUA balance to also cover the RMDs for the amount of IRA transfered to 401k? 

Submitted by Alan - IRA critic on Thu, 2022-04-21 00:14

No. Whether you were able to do a 60 day rollover or a direct rollover from the IRA to the 401k, it would be treated as a distribution from the IRA and applied to the IRA RMD since you are 72.  If you had rolled the IRA into the 401k last year, then you would have increased the 401k value and RMD and eliminated the IRA RMD.

Submitted by abraham boznick on Thu, 2022-04-21 04:08

OK. Thank you. I am asking these questions preemptively.  As I will be turning 72 in 2023. If I understand your response correctly — I should be able to do this this reverse IRA transfer to my 401k THIS year and then use my NUA distribution in 2024 (1st and 2d payment RMD payment) to cover RMD from for the total amount I will have by 2024 in my 401k (which also includes IRA transfer this year)?

Submitted by Alan - IRA critic on Thu, 2022-04-21 14:18

Yes, that’s right. Earlier, I thought you were 72 this year. So you still have time to roll your IRA into the 401k this year in order to eliminate the 2023 IRA RMD by increasing the 401k 12/31/2022 balance and therefore your 2023 and 2024 401k RMDs. Hopefullly, your plan will accept IRA rollovers including from non “rollover IRAs”.  Of course, any basis in your IRA from non deductible contributions cannot be rolled into the 401k. If you have IRA basis, retain it in the IRA and then convert it tax free to Roth after the 401k plan has accepted the pre tax IRA balance. 

Submitted by abraham boznick on Fri, 2022-04-22 21:49

Thank you very much again for the great service you are providing to the community. Just to confirm — I can transfer funds from my outside IRA account into my 401k at any time without precluding me in using NUA distributions. Even though the reverse (taking the funds out of 401k in prior years) would preclude me in doing NUA distribution.

Submitted by Alan - IRA critic on Fri, 2022-04-22 23:18

Yes, those “intervening distributions” after a triggering event will nullify NUA, but you are making a rollover contribution, not taking a distribution and therefore it should have no effect on your NUA. Nonetheless, you should verify this with the plan administrator that accepting an IRA rollover will not prevent them from showing your cost basis and NUA on the 1099R following the LSD and delay the rollover until they can assure you it will not be a problem. It is also recommended to verify that your LSD of employer shares will qualify for NUA for all other purposes just before requesting the LSD, just to be safe. 

Submitted by William Kempner on Mon, 2022-10-10 21:00

Alan, I am 72 this year ( August 2022 ) and have an RMD on my 401K account to be paid by April 2023 since it is my first year. I have a significant low cost basis for part of my 401K and was planning to try and use the NUA to pay for the RMD for the 2022 and 2023 years. I am a little confused as to how to withdraw the NUA and document that the funds apply to the RMD properly for each year. My understanding is that  the RMD has to be the first item taken out of the 401K for the NUA to work properly . Should I actually take a partial NUA withdrawal equal to the  2022 RMD and then a partial NUA withdrawal for 2023 RMD separately that way documenting that the monies are for the RMDs ( all this prior to April 2023), or can I just take the complete NUA at one time and the information can just be documented as to what year on the IRS income tax forms for RMDs for 2022 and 2023. I do have more than enough  money in the market value of the NUA to cover the both the RMDs.  

Submitted by Alan - IRA critic on Mon, 2022-10-10 23:25

  • You do not need to take separate RMD distributions for the 2 years, but you do need to be sure that the employer share distributions done before the remainder of the LSD, so that the first dollars out are the employer shares. They will then satisfy the RMD. If the plan only permits a single distribution, then you must make it clear to the plan that you want the employer shares to earmarked for the RMD.
  • As for tax reporting, all you need is a single 1099R coded 7 with an amount in Box 1 that is sufficient to meet 2 years of RMDs. This is all the IRS will be looking at with respect to RMDs and will be a 2023 1099R and reported on your 2023 return. There will be another 1099R coded G for the direct rollover of the remainder of the plan balance to your IRA. 
  • If you have any Roth 401k balance or after tax non Roth balance, please advise as this involves additional transactions.
  • I would initiate the distribution no later than mid Feb, 2023. There should be no 1099R or any distributions taken this year, and nothing will show on your 2022 return.
  • This is a wise strategy, but of course must be executed properly. Be sure the cost basis of the employer shares is low enough to justify NUA. If that cost basis has risen above 30% of current value of the shares in Feb, NUA may not be beneficial.

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