NUA Help
I have heard about and researched NUA but have never had the opportunity to apply a real life situation. I have come across one recently and I have spoken to accountants and other financial advisors within my network. It is amazing to me how few people have heard of NUA or know very little about it. In other words, I am finding it difficult to find anyone that can walk me through a real life case study to share the nuances.
My current scenario is a husband and wife ages 58 and 55 respectively. The 58 year old has a 401k with $3.8 MM of company stock with a cost basis of approximately $250,000. I understand the main logistic of the needing to distribute the cost basis into and IRA and move the NUA into a non-qualified brokerage account. Below are my many questions on how to proceed:
- I don’t understand the concept of having to pay income taxes on the cost basis when it is rolled over into an IRA. I would have to assume that when the IRA is further distributed as a withdrawal, that income taxes will be paid on it again!?
- Since the individual is under 58 and 1/2, will he have to pay a penalty on the $250,000 rollover as well.
- Does the NUA have to happen within a given time frame of termination of employment?
- I know the distribution of the NUA and cost basis has to happen with 12 months I understand. Does this mean that the triggering event starts once one of the two are moved. For instance if the cost basis is rolled over into an IRA, within 12 months from that point forward the NUA needs to be moved? And if this is the case, can they be moved into a different tax years.
- I am asking the above question because I was trying to understand why my logic is flawed that if the person did the transactions in two different tax years that they could keep there married filing jointly income below $97,000 so they would not have to pay any LT gains on the NUA, even if they liquidated all of the shares at one time in the low income year. I am sure this would be too good to be true and thus like I stated early, need some help in understanding why my logic is flawed.
- I used Right Capitol to help me understand if NUA would be the right thing to do. Overall it shows me that if one or both of the clients lives to age 90, that utilizing NUA will save them on taxes overall quite substantially vs not doing NUA. But my software tells me they will have over $15 MM in IRA money left at age 90. At a 35% tax rate that would mean that about $10 MM would be left to the kids. With utilizing NUA, they are only projected to have about $5 MM left for the kids because of the 1.3 MM tax payment in year one. Even if that $5 MM all receives a step up in basis upon death, isn’t $10 MM more than $5 MM or is my logic flawed again.
- Am I correct that the client could liquidate shares of the NUA as they are needed for retirement income over many years. And if they do that, they will spread out the tax bill. And if this distribution strategy is utilized, again why wouldn’t they get tax free liquidation of this stock if their income is below the Fed tax bracket threshold where LT taxes are at 0%. Of course the downside of this strategy is lack of diversification by having almost all of their investments tied up in one stock.
Sorry for this being so long. I would be willing to pay for the advice needed to address this situation correctly and most efficiently.
Thank you kindly in advance for any help.
Tracy Reierson
Permalink Submitted by Alan - IRA critic on Fri, 2025-05-09 13:50
You have some misconceptions about NUA.
The cost basis is not rolled to an IRA, it is a portion of the share value that is distributed to a taxable brokerage account. However, a lump sum distribution of the entire 401k must be completed in the same year in order to qualify for NUA. The balance of the plan assets other than company stock is what is directly rolled to an IRA.
250k is a very low % of the total share value, which makes NUA an attractive transaction. The lump sum distribution (LSD) must follow a triggering event, which in this case was separation from service. Reaching 59.5 is another triggering event. There also cannot be an “intervening distribution” after the triggering event and prior to the LSD year as that disqualifies the LSD. The LSD year itself is not subject to a time limit as long as no intervening distributions are taken, and those include the rollover of any portion of the plan to an IRA. But the person could do a rollover of the rest of the plan to an IRA now because they will acquire a new triggering event at 59.5. In other words, what would have been an intervening distribution is erased if a new triggering event occurs in a later year. Death is also a triggering event if the person were to pass with the NUA shares still in the 401k. Finally, note that if a beneficiary inherits NUA shares, there is no step up in basis on the NUA value per share, which would result in the beneficiary still owing LTCG taxes when they eventually sell those NUA shares.
Therefore, if the person proceeds with the LSD, they will owe ordinary income tax on the 250k cost basis. When the shares are sold in the future from the taxable brokerage, LTCG rates will be due on the amount of NUA per share sold. Again, none of the value of these shares is ever rolled to an IRA. One issue with this much company stock is diversification, which should trump the tax benefit of NUA. To diversify, many of the shares would have to be sold shortly after distribution, and CG taxes would be due. If the shares are held for many years, there is no CG taxes, but there is a diversification risk of holding too much in the shares of a single company.
If the person has separated from service at age 55 or later and does the LSD before 59.5, there is no penalty on the cost basis taxation due to the separation from service exception and never a penalty after 59.5.
Before acting the person should discuss their distribution with the plan administrator and get a quote on the cost basis per share and verification that the 1099R will show a total distribution and the NUA amount in Box 6.
Permalink Submitted by Tracy Reierson on Mon, 2025-05-12 10:19
Very grateful to you for taking the time to help me understand some of my misconceptions.
Permalink Submitted by RonC on Thu, 2025-05-22 14:44
Please forgive me for butting into this .. I did a similar move a few years back albeit on a smaller scale. My cost basis was low too, lets say $10 per share and shares values at $100, so $90 is the NUA. So for ease of math, lets say that stock is now $200 per share. Heirs would owe CG tax on $90 per share but if I cash-out (for diversification or for my own use) I would owe CG on $190 per share.
The heirs situation is much better as their “step up in basis” would be from $10 to $120 for Cost Basis (NUA stays the same). Just want to make sure I understand this correctly. Thanks, Ron