NUA distribution via indirect transfer
Can I have indirect transfer (rather than asking my employer to do it) of my NUA stocks where the stocks come to to me for redeposit which I need to put into the brokerage accounts within 60 days to preserve the NUA treatment?
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-27 14:25
is this a private or publicly traded company? While not having your evidence of share ownership held by a brokerage firm should not prevent the plan from issuing you a 1099R showing your cost basis and amount of NUA, even if you proceed this will result in considerable extra time and effort.
If you receive NUA shares and want to retain the NUA option, you would not roll the shares over, so there is no 60 day deadline. While you CAN opt to roll the shares over to an IRA within 60 days of receipt, then you would forfeit use of NUA for those shares. You have this same option if your shares are transferred to a taxable brokerage account – you could transfer them to an IRA within 60 days instead of using NUA.
To be clear, if you sell such shares and report a LT cap gain using NUA, you cannot then roll the proceeds of the sale to an IRA.
Permalink Submitted by abraham boznick on Wed, 2022-04-27 21:47
Thank you. It is large publicly traded company. If I decide to do indirect transfer of NUA stock. How will I receive the NUA shares? Will I receive it via stock certificates? If it is stock certificates — will I be able to roll over some of these shares into IRA account and transfer the rest of the shares into a regular brokerage account?
Permalink Submitted by abraham boznick on Fri, 2022-04-29 04:48
just a follow up to my question above. If upon my request I am issued share stock certificates and later on I deposit these stock certificates into a brokerage house. How do I report the cost of these deposited shares? Does my 401k plan which distributed these stock certificates to me has an obligation to provide me with the shares basis?
Permalink Submitted by Alan - IRA critic on Fri, 2022-04-29 15:25
Yes, you would not want to request a distribution without knowing if the cost basis was low enough to make NUA beneficial. If these shares are the only part of your plan distributed to you (not part of a direct rollover), your 1099R will show the cost basis and NUA, but by that time it is probably too late to change your mind and do a 60 day rollover of the shares to an IRA and not utilize NUA if the cost basis is too high.
You also need to supply your brokerage firm with the cost basis per share at distribution, since if you sell shares in the first year, they will have to break down the sale into LT gain and ST gain for gains after the date of distribution. After 1 year, the entire sale will be LT. Brokerages have different ways of handling this data, so you will have to ask them how they will report your sales. As for the distribution from the plan, you report that on your tax return according to the 1099R you will receive the following January. Taxes are owed only on the cost basis in Box 2a, and you might owe a penalty on the cost basis unless you are over 59.5 or separated from service at 55 or later.
Permalink Submitted by abraham boznick on Sat, 2022-04-30 02:36
I have records of my company shares cost basis by lot in 401k. I would like to obtain stock certificates for my company stock from my employer .Then I plan to invest the shares with low cost basis into the brokerage account and high cost basis shares into IRA. As an example, assume that my total distribution of company stock shares (done via indirect transfer directly to me) is equal to 1,000,000. Low cost basis shares are equal to 600,000 (plan to put them into the brokerage account) and the amount of high cost basis shares is equal to 400,000 (plan to roll them over within 60 days into IRA). How would the brokerage house obtain the cost basis of my 600,000 shares? How woud these transactions (what forms?) and by whom be reported to IRS? I understand that the initial 1099R will show onlly the TOTAL cost basis of ALL distributed shares from 401k plan.
Permalink Submitted by Alan - IRA critic on Sat, 2022-04-30 16:07
The majority of plans use average cost basis for NUA shares, and will issue a 1099R accordingly. Substituting your own records for the plan records is risky and there is no way to predict how the IRS would react if they became aware of it. On the other hand, if your plan does provide accounting by lots of share purchases, then you could simply have them distribute the low cost basis shares to your brokerage and roll the high cost shares over to an IRA where they could be sold without current taxes and that would also provide you more diversification right away. Or you sell those high cost company shares in the plan before the distribution and attain diversification even sooner.
Brokerages may vary with how they handle NUA shares. Some may just take your word for the cost basis, others may want some form of documentation. When you sell shares, some may not report the cost basis and you would have to report your own cost basis/holding period on Form 8949. The safest combination with respect to the IRS is first using the plan accounting which is average cost basis for all shares in most cases, second selling shares you do not intend to use for NUA within the plan to eliminate the 60 day rollover, and finally using a brokerage firm that can explain to you up front what they need in order to report the cost basis and holding period (LT or split LT/ST if you sell shares in the first year) on the 1099B. That will eliminate the need for you to report the sale as a non covered security or worse yet, having to change the cost basis that the broker reported on the 1099B.
No IRS publication as far as I know provides guidance on how to report a sale in the first year where there are gains after distribution, as those gains in the first year are ST. In that case, you have to improvise by reporting a split sale of the same security. One way to do that is to split the amount received into the LT portion and the ST portion, each with the same cost basis, and provide an explanatory statement with the return that you split the sale because the shares are NUA shares that were sold in the first year, and there were ST gains.
If the shares you sell have lost value between distribution and sale, reporting is simple as the drop in value is just NUA that evaporated, and what is left is all LT. Remember, diversification should always trump tax benefits as you are risking principal. As such, I would not have any dividends reinvested as that will just complicate the reporting and reduce diversification. Within your plan, there are variations on how dividends are handled. Note that Sec 404(k) dividends if you have been receiving them are NOT treated as intervening distributions that would disqualify your LSD.
If you know of another former employee who may have utilized NUA from your plan, you might talk to them as to how then plan handled reporting, and how their broker handled it, but of course you are probably using a different broker.