NUA & Split Rollover?
A client (58) has pre-tax and after-tax with employer stock in her 401k. If she retires Dec. 1, can we still NUA on Jan. 1 since the triggering event was separation of service, or does it have to be the same year she separates? Ideally, there is no income the next year when completing NUA. Assume the basis is $50k in pre-tax and $100k in after-tax basis, for a total $150k basis of employer stock. I read somewhere that you can use the after-tax basis to offset the pre-tax basis? Is that true, and how does it work? Alternatively, could we NUA the $50k pre-tax basis and leave the $100k after-tax basis to convert to a Roth IRA during a split rollover? I know we would have to do it all in the same year, we are giving up the rule of 55, and the earnings in the after-tax 401k have to go to the Trad. IRA.
Permalink Submitted by Alan - IRA critic on Thu, 2025-08-21 17:40
Basically correct.
The LSD does not have to be in the year of separation, but no distribution after separation is allowed until the LSD year, in which a total distribution is required. So there is no reason to try and squeeze the LSD between the separation date and the end of the year 1 month later. The LSD can be done in 2026.
The plan provisions will determine how the non Roth after tax basis can be applied. The plan may require it be used to reduce the taxable cost basis of the NUA shares, or they might allow a choice of using it for a direct rollover of other than NUA shares to a Roth IRA. Client needs to check with the plan regarding the choices, and then make the decision if client has a choice.
If client is allowed to apply the 100k of basis for a tax free Roth direct rollover for other than the employer shares, then the taxable cost basis of the NUA shares will be 150k. There is no 10% penalty on the taxable cost basis due to the age 55 separation exception, so that will not have to be given up, but the 150k of taxable income will increase the marginal tax rate.
Permalink Submitted by Charles Thomas on Fri, 2025-08-22 09:18
Thank you, Alan. The first two paragraphs make sense, but the last paragraph I don’t quite understand. If the plan allows for the $100k after-tax basis to be moved directly to the Roth IRA via direct rollover tax-free, and the other $50k pre-tax basis to complete NUA. How can the taxable cost basis be $150k if we only have $50k in NUA from the pre-tax account?
Permalink Submitted by Alan - IRA critic on Fri, 2025-08-22 10:23
The after tax cost basis can only be used once, either to reduce the taxable cost basis for the NUA distribution or to be applied to the other assets rolled to a Roth IRA.
Either way, the NUA per share remains the same and the actual cost basis per share remains the same. The only difference is the amount of the cost basis per share that will be taxable. If the after tax amount is not used to reduce the taxable portion of the cost basis, all 150k will be taxable.
The most likely plan provision is that the after tax amount will have to be applied to reduce the taxable portion of the cost basis, and the participant will not have the option to apply it differently. But it still can’t hurt to ask if participant would rather not have it applied to reduce the taxable cost basis.
What is the total value of the NUA shares? Normally, NUA is only beneficial if the cost basis is less than 30% of the FMV of the shares.