NUA from a Bene 401K
I have a client whose father passed away last year @ age 85 but did not take his RMD before his death. The son inherited the 401k as his only beneficiary last fall. In Dec, the plan admin sent the son a check for his father’s RMD that had not been taken prior to his death. In looking at the plan this year in anticipation of doing a direct rollover, I noticed company stock with an extremely low-cost basis (~9%) and immediately thought of utilizing the NUA for the company stk and rolling over the remaining assets. However, my question is does the 2024 RMD of his father sent to him in Dec exclude him from utilizing a NUA distribution this year?
Thank you for your thoughts.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-21 13:57
Few planners would even have thought about NUA for a beneficiary.
Unfortunately, that 2024 RMD paid to the son constitutes an intervening distribution which will eliminate his option for a qualified LSD for NUA purposes because father’s death immediately made this an obligation of the son to be distributed to the son. Father’s death did trigger a new triggering event for LSD purposes, but the son needed to catch this last year when the year of death RMD could have been part of an LSD for NUA purposes, although son would have also owed tax on the cost basis of the shares.
Perhaps establishing himself as the beneficiary resulted in the plan automatically distributing the year of death RMD without warning, even though that RMD could have been deferred to this year per the final Secure Act Regs and the LSD requirements could have been satisfied in 2025.
As far as I know, the only special exemption for the year of death RMD is that the distribution of this amount does not eliminate the option of the beneficiary to disclaim within 9 months of death (RR 2005-36), ie. that the beneficiary is treated as not having yet accepted the account. This RR does not extend the exception to any other purposes beyond disclaimers.
Permalink Submitted by Philip Summers on Fri, 2025-03-21 16:31
Thank you for the quick response. Fidelity, the plan custodian, automatically sent the RMD check to my client once they were informed of his father’s death, set up his acct and moved the assets. He died on Jun 15th and they didn’t get the assets moved over until Nov with a check being rec’d in early Dec.
They didn’t contact him or give him an opportunity to defer this until this year. Can you elaborate on the special exemption you referenced? Are you saying that he would disclaim the RMD payment that wasn’t requested or the whole retirement acct? Also, do you think if he contacts Fidelity, they would be able to do anything?
Again, thank you for your direction.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-21 17:06
No reason to disclaim. I only mentioned the disclaimer exception to make the point that it was the only exception I know of under which the beneficiary is not treated as accepting the account. There is no such exemption for a year of death RMD that the plan distributes without informing the beneficiary that they had an option to receive it next year. If that distribution had not been done, the NUA strategy would have been available in 2025 and the year of death and the beneficiary RMD would have been part of the LSD.
Not sure that all plans would have proceeded the way that Fidelity did. It’s very possible that they knew the year of death RMD no longer had to be completed in the year of death, but their operating procedures might have called for the year of death RMD to be distributed ASAP, which is what they did.