How Familiar Are You with NUA Rules? This Week’s Q&A.

This week’s Slott Report Mailbag examines NUA rules and the “still working” exception. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

I really enjoyed reading The Retirement Savings Time Bomb book and also your website. Thanks for all the information you share!

I retired from Procter & Gamble at the end of last year, and have now transferred some stock to a brokerage account using the NUA strategy. My question is, are the dividends paid on that stock considered qualified (meaning LTCG rates apply) or are they considered ordinary income?

Thanks,
Marvin

Answer:

For most purposes, your employer stock is now treated the same as any other stock you own. The only difference is that the NUA amount is always treated as long term capital gain. Any other gains will be taxed at the time of the sale according to their holding period, which will start with the time the stock is held in the brokerage account. Dividends will be taxed by following the rules for all other stock dividends. The tax will depend on whether the dividend is qualified or non-qualified and how long it has been held based on the ex-dividend date among other things. You should consult with a tax advisor to determine how your dividends would be taxed.

Question:

Dear Mr. Slott,

I have been a long time subscriber of your newsletter.

I am still working full time as a physician employee of a hospital. I am 78 years old.
I have a 401(k) defined benefit plan along with a 403(b) plan in TIAA/CREF from my current employer.

Last year in April 2016, I did a direct rollover of several hundred thousand dollars from my 403(b) plan into a Vanguard Rollover IRA, because the investment options in the 401(k) were limited.

Later that same year, the 401(k) plan offered more investment options, so in October 2016 I did a direct rollover back into my 403(b) plan. The balance of my Vanguard IRA Rollover plan was zero at the end of 2016.

Both institutions (TIAA and Vanguard) said these were legal transactions as they were both direct rollovers. My hospital employer said my 403(b) plan was permitted to take direct Rollovers from a Rollover IRA.

Are there any tax consequences from these two direct rollovers? Will I owe any money for an RMD from Vanguard?

Thanks for your consideration.
Dr. Fred

Answer:

You will not have any RMDs based on your transactions.

The funds that left the employer plan were not subject to an RMD because you worked there for the entire year and the plan had a “still working” exception to the RMD rule.

There was no RMD for the IRA because your prior year-end balance was zero for the year before you did the rollover. It was also zero at the end of the year in which you did both rollovers, so again there was no RMD from the IRA for the following year.