NUA – Holding Period for LTCG
Suppose a client purchases $10,000 of employer stock in their 401k plan which grows to create net unrealized appreciation. Suppose then a triggering event takes place which allows the client to have the client’s 401k custodian transfer the shares of employer stock to a taxable brokerage account while the rest of the 401k is rolled over to an IRA. On the date of distribution suppose the employer stock was worth $100,000. Sometime later, the client then sells the employer stock in the taxable account which is now worth $120,000. The employer stock was purchased inside the 401k less than 12 months before it was sold in the taxable brokerage account. Does the $90,000 NUA on date of distribution receive LTCG treatment despite not being held 12 months? Does the $20,000 gain since distribution date NOT receive LTCG treatment because it was not held 12 months?
Permalink Submitted by Alan - IRA critic on Tue, 2024-06-18 18:54
The NUA per share will receive LTCG treatment regardless of when the shares were purchased in the 401k. However, if the shares were only purchased in the final year in the 401k it is highly unlikely that there would be enough gain to make NUA viable. The value would have to at least triple in under a year.
Additional gains on NUA shares after the LSD will be taxable at the short term cap gain rates if the shares are sold in the first year after distribution. After one year, these additional gains would get the LT rate, just like the NUA per share.
Put another way, the holding period inside the 401k is immaterial, but it matters if there are additional gains on the shares after distribution and the shares are sold in the first year.