Net unrealized Appreciation – partial rollover
I have a client with company stock in their 401k, and they are interested in using the NUA strategy. I read an article that states you can do a partial rollover and avoid paying taxes on ordinary income. Here’s the example, 401k balance is $500k, $200k is in company stock with a cost basis of $100k, and $300k in other investments. The idea is to move the $100k cost basis, the $300k other investments to the IRA, and the $100k unrealized appreciation to the brokerage account. No income taxes would be owed since the cost basis was moved to the IRA, and the brokerage account would be taxed at capital gains with zero cost basis. I have been looking on the IRS site for a place to confirm this is possible. Something that states that the rolled portion is “treated as consisting first of the portion that is includible in gross income.” Is this correct?
Permalink Submitted by Alan - IRA critic on Tue, 2023-02-14 02:47
There is no official guidance on the “Frank Duke method”. No doubt this has been tried in the past with no IRS inquiry because the IRS did not understand what was being done, which was basically separating the cost basis per share from each share into a total aggregate cost basis of all shares, then rolling the number of shares equal to the cost basis to an IRA, leaving the remaining shares as 100% NUA. Doing this is rolling the dice with an unpredictable outcome.
Permalink Submitted by Carlos Lopez on Tue, 2023-02-14 05:55
NUA allows you to move all or part of the company stock to a taxable brokerage account and everything else rolls to an IRA. You cannot seperate the basis from the stock as this is what is used to determine the NUA and thus reported to the IRS. Nor can you transfer the basis of the stock to other investments within the 401k when you rollover to an IRA. The whole point of NUA is to transfer all or part of the company stock, with the basis to the taxable account. Then if sold immediately, the NUA would be taxed as long-term capital gains. If held, and sold later, the additional gains (if any) on top of the NUA would be taxed as short-term or long-term capital gains depending on whether the stock held for less than a year or greater than a year. Everything else in the IRA, including any company stock that the client chose not to participate in NUA at the time of the rollover, is subject to ordinary income.