401(k) Stock as Roth Conversion?

Submitted by Bob James on Tue, 2023-02-14 12:07

Would like to rollover long held Company 401(k) with IRA, Roth and Company Stock portions – Direct IRA to IRA and Roth to Roth as non-taxable. Wondering, can the Stock Basis (taxed as regular income) be added to Roth as conversion?



Submitted by Alan - IRA critic on Tue, 2023-02-14 16:13

  • Not if NUA will be utilized. If the company shares are distributed to a taxable brokerage account and NUA is applied, the proceeds cannot be rolled to a Roth IRA. However, the employee does have the option to NOT apply NUA and do a 60 day rollover of the shares to a Roth IRA. In that case, taxes would be due on the entire value of the shares including the NUA like a typical Roth conversion. While clear IRS guidance regarding combinations of NUA and rollovers is lacking, Q 7 of Notice 2010-84  regarding the same issue with respect to an in plan Roth rollover is copied below:
  • “Q-7. What are the tax consequences of an in-plan Roth rollover? A-7. The taxable amount of the in-plan Roth rollover must be included in the participant’s gross income. The taxable amount of an in-plan Roth rollover is the amount that would be includible in a participant’s gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution reduced by any basis the participant has in the distribution. (See Notice 2009-75, 2009-35 I.R.B. 436.) Thus, if the distribution includes employer securities attributable to employee contributions, the fair market value includes any net unrealized appreciation within the meaning of § 402(e)(4). “
  • In other words, if shares eligible for NUA were converted in plan, taxes would be due on both the cost basis and the NUA per share, and Roth IRA conversions would be subject to the same rules. 
  • Therefore, distributed shares could be reported as NUA per the usual rules, or the employee could change their mind and do a 60 day rollover of the shares or the proceeds from selling the shares to either a TIRA or Roth IRA, but could not combine the elements of NUA with a rollover.

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