NUA distribution and then rollover and then roth conversion

Submitted by abraham Horowitz on Wed, 2023-07-12 15:59

Good Morning,
I am 52 years old and looking to take a distribution of company stock with basis of around $20,000 and fair market value of about $50,000. I separated from service 3 years ago and at that point I rolled the Roth portion of my 401k over to a Roth IRA. I left the pretax company stock as well as about $90,000 worth of pretax mutual funds in the IRA. I would like to convert the pretax money into Roth funds and roll that to a Roth IRA. I would like to also distribute the NUA shares to a brokerage account.

I would like to then do a 60 day indirect rollover by contributing $20,000 in cash into a traditional IRA to avoid paying taxes and 10% penalty on the distribution. Is this permissible?

After doing the rollover, I would like to convert the $20,000 from the Traditional to my Roth. I believe that the end result of these transactions would be to avoid the 10% penalty for early distribution, pay $20,000 in taxes for the Roth conversion and have the stock in a brokerage account with a $20,000 basis which I plan to hold for the long term. Will this fly?

Finally, does the fact that I distributed the Roth funds two years ago mean that I lost the opportunity to do a NUA distribution?

Thank you in advance for your help.



Submitted by Alan - IRA critic on Wed, 2023-07-12 16:29

  • Your prior direct rollover of Roth 401k funds to a Roth IRA is an intervening distribution that erases your ability to do a qualified LSD for NUA purposes until you have a new triggering event, which would typically be reaching age 59.5. However, since your plan apparently allows partial distributions, you should still be able to a qualified rollover contribution of pre tax funds to a Roth IRA. There is never a 10% penalty on such rollovers, just ordinary income tax. You will have to determine from the plan if you have any non Roth after tax contributions that would be applied to this rollover to reduce the taxable portion.
  • I assume that the “basis” referred to for the company shares is the cost basis for NUA purposes. A cost basis % of 40% (20k out of 50k FMV) is not particularly appealing for NUA execution since you would owe ordinary tax on 20k up front. But there would be no penalty on the 20k since you could not do the LSD before reaching 59.5.

Submitted by abraham Horowitz on Wed, 2023-07-12 17:36

Thanks for the prompt reply and clarificiation of the impact of the prior rollover on my ability to do a qualified LSD at this point in time.  Regarding your point on the taxes owed for the NUA distribution upon turning 59.5, can I avoid those taxes by doing an indirect rollover and rolling $20,000 in cash to an IRA within 60 days of taking the NUA distribution? Best Regards,

Submitted by Alan - IRA critic on Wed, 2023-07-12 19:39

No. You cannot combine NUA with a rollover to an IRA of the shares or the proceeds from the sale of those shares. For example, if you take a taxable distribution of 50,000 worth of NUA shares for which you would report 20k of taxable cost basis income, you could not roll over that 20k to erase the tax while retaining the NUA cap gain portion. Another way of putting this is that each share is 40% cost basis and 60% NUA. You do not have to utilize NUA on all the shares, so you could roll over half the shares or the proceeds of a sale if you do not claim NUA on those shares, then use NUA on the other half with your cost basis of 10k and NUA of 15k. 

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