NUA due to death (deceased spouse), under 59.5- subject to penalty?
Client is under 59.5, husband recently deceased. We are considering NUA for her based on late husband’s 401k. Trying to determine if she would be subject to the 10% penalty since she is under 59.5 or if this distribution would be coded due to death and therefore not subject to the 10% penalty? Thank you!
Permalink Submitted by Alan - IRA critic on Mon, 2023-05-01 15:02
All 401k distributions would be coded as death distributions (Code 4 on 1099R) and therefore the taxable cost basis of NUA shares will not be subject to the penalty. While realizing income in the final year of joint filing is generally a good idea, if the cost basis per share is not low enough to justify NUA, Roth conversions might be a better alternative. Further, if the plan holds non Roth after tax contributions, it should be determined how they will be applied by the plan. Many plans will apply them to reduce the taxable cost basis, but they might also be used for tax free Roth conversions for the spouse.