NUA Rules For Two 401k Accounts with Same Company (Employee & Beneficiary)
I’m seeking guidance on how NUA trigger events and lump sum distribution (LSD) rules apply to my situation. I have two 401k accounts with the same company under my name. One is my regular 401k. The other is an inherited beneficiary “takeover” account in my name subject to the plans “90 day force out” clause (the clock is ticking).
Background
My late wife and I worked for the same company. We each had 401k plans. In 2016 the company sold our division to another company, which became our new employer. Both 401k plans remained with the original company. No distributions were ever taken from either 401k.
I’m 68. My wife died in 2021 at age 61. So no RMDs yet. Two months ago I notified the 401k plan administer of my wife’s death. They transferred her 401k to my name as a beneficiary “takeover” account subject to the plans “90 day force out” clause, as mentioned above. When I log into my 401k web account I see both 401k plans listed separately with the same name and plan number, differentiated by extension qualifiers ext-1 (my 401k) and ext-2 (beneficiary 401k). Both accounts contain employer stock potentially eligible for NUA distribution.
Discussion
How do the NUA trigger events and LSD rules apply to these two 401k accounts? Are the accounts treated independently? Or are the accounts tightly coupled and treated as one? In other words, does the IRS consider these two accounts to be of the same “kind” or not?
A plan advisor verbally told me the NUA rules were as follows:
- NUA on multiple accounts must occur in same year.
- If I elect NUA on ext-2 account now, must elect NUA on ext-1 account this year or NUA opportunity for ext-1 is lost.
- If I elect NUA on ext-2 account now but don’t want to elect NUA on ext-1, I don’t need to liquidate ext-1 this year.
- If I bypass NUA on ext-2 account now, I still have the option to elect NUA on ext-1 account in later years.
- Exception is due to 90 day force out of ext-2 account.
ext-1 – my 401k
ext-2 – beneficiary 401k
Are these rules correct? They seem inconsistent. Rules 1 and 2 imply the accounts are tightly coupled. Rules 3 and 4 imply the accounts are independent. If the accounts are tightly coupled and I elect NUA on the ext-2 account now, rule 3 would appear to invalidate ext-2 account NUA eligibility.
Ideally, I’d like to treat the accounts independently and have the option to take NUA distributions in separate years to spread out the tax on the cost basis.
Any guidance greatly appreciated.
Permalink Submitted by Alan - IRA critic on Sun, 2025-04-27 22:55
While I cannot locate any on point IRS guidance on this question, it does appear that this rather unusual situation where you as the recipient of your own interest in the plan and as a recipient as a beneficiary must be combined since the plan distributing your interest is the same plan for both your recipient interests. Under this interpretation, you would be required to complete a total distribution of all your interests in the same year in order to qualify as an LSD for NUA purposes. As such the advisor’s list has conflicts and makes no sense.
Nonetheless, the IRS will be guided by the 1099R, and if the total distribution box for both 1099R forms is not checked, there can be no NUA amount listed in Box 6. That said, while you would need to empty both accounts this year because the beneficiary account is being forced out, you should be allowed to elect NUA for only one of them if you want to avoid too high of a taxable cost basis. You would have to determine the % of cost basis to total value to determine which portion has the lower cost basis per share. You are also not required to have all the eligible shares transferred to a taxable brokerage account as it is allowed to only distribute some of the shares for NUA purposes. Finally, most plans use average cost basis for all NUA shares, but a few plans track the cost basis for separate lots, which would allow you to choose the lowest cost shares for NUA and you could sell the rest in the plan to get instant diversification. Sometimes, NUA is overrated and probably not beneficial unless you plan to sell all the shares for immediate spending needs, as then you pay the lower CG rate on the NUA instead of ordinary income rates if you passed on NUA.
You did not ask this, but if your wife was born in 1960 and you did a direct rollover of all or part of the inherited 401k to an inherited IRA (not your own IRA), RMDs would not have to begin until the year she would have reached 75 (2035?). For your own IRA, your RMDs begin at age 73. However, if you prefer simplification, you could roll both into your own IRA now and avoid an inherited IRA, but your RMDs for the entire balance would start at 73.