Does my non-NUA plan make sense?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Into the Woods
Posts: 9
Joined: Fri Apr 12, 2019 11:16 am

Does my non-NUA plan make sense?

Post by Into the Woods » Mon Apr 22, 2019 10:51 am

As advised on a previous post, I need to do a 401k rollover as plan is lousy. The topic of NUAs came up and I’ve since been reading Wiki, forum and other sources regarding them. I’ve come to the conclusion NUA might not be ideal for me, but would like some feedback as to whether I’m making sense, but most importantly, that I’m understanding this. Probably same thing :D

I’m 57, she’s 56, both retired. 12% marginal rate, 13-15k left before topout there. After my rollover we’ll have very high 6 figures in rollover IRAs. We’re thinking about her SS at 62, her pension at 65, my SS at FRA or 70. Currently enough taxable to handle emergency and any other unexpected expenses that come up for several years. Her SS will probably put us in 22% bracket. Don’t believe we’ll ever be above current 22% bracket, but RMDs might change that. Another area of exploration.

Let’s say in round numbers there is 100k in CO stock, 51% cost basis. I’ve already been advised/read this probably won’t be a great situation NUA wise, but I need to understand it myself. If I was to add the 51k cost basis to our income, that would put us firmly in 22% bracket. Also would be 15% LTCG on stock earnings, making for hefty tax bill this year.
If instead I did rollover, sold CO stock within IRA (doing this for diversification going into 3 fund portfolio) and then did Roth conversions to top of 12% bracket until her SS, that would cover roughly the same amount of funds the NUA would take out now, leaving it there to grow, and pay lower 12% rate in process. Taxes on conversions can be handled out of taxable. Make sense. Yes? No? Am I understanding this correctly?

We may still need to do more conversions, later, after reaching 22% threshold, but I’m thinking this is a starting point, keeping us at 12% and being better than doing NUA now.
Thanks for your thoughts.

bsteiner
Posts: 4076
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Does my non-NUA plan make sense?

Post by bsteiner » Mon Apr 22, 2019 11:55 am

Without running any numbers, your analysis makes sense. The cost basis isn't very low, and Roth conversions are available.

I haven't analyzed any NUA situations in a while, but the conventional wisdom before Roth conversions existed was that they generally made sense where the cost basis was relatively low compared to the value.

Since Roth conversions often add substantial value, now that they're a possibility, the rollover is preferable more often than it was before Roth conversions were available.

Alan S.
Posts: 8477
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Does my non-NUA plan make sense?

Post by Alan S. » Mon Apr 22, 2019 1:44 pm

I agree. The cost basis is way too high to make NUA viable. Usually 25-30% of FMV is about the max cost basis that makes sense barring a very unusual situation. Further, if the plan expenses and options are not ideal, waiting for the cost basis to drop should the shares appreciate further, would also come at a cost against the entire balance in the plan.

If there are any after tax contributions in the plan, remember to do a split rollover so that all after tax amounts go to your Roth IRA.

TBillT
Posts: 695
Joined: Sat Sep 17, 2011 1:43 pm

Re: Does my non-NUA plan make sense?

Post by TBillT » Mon Apr 22, 2019 2:04 pm

I did NUA upon rollover, and that has been fun in our case. Being a stock market bear, I was anxious to sell the stock at its high point. I was able to make the sales at low or zero federal tax rate by making that stock sale the main income for a couple years. Now I still have about 30% of the stock left and that will be handy for donations (eg; DAF Donor Advised Fund) in the era of SALT deduction limits.

One thing our workplace recommended over the years was putting some after-tax money in the 401k, so you can pull out the stock cost basis as your contributuon (avoiding immediate income taxes on the stock withdrawal itself). Also before retirement I had sold off the higher cost basis stock shares, so alls I had left for NUA was very appreciated stock.

I think of it as similar to Roth Conversion, if I had rolled over the stock to the IRA or held it, I would just have that much more IRA to try to convert to Roth prior to RMD, and also if I sold it after RMDs, my income level would be higher tax bracket.

Not sure your case but those are some thoughts. I retired early but held the 401k until about age 63 when I did the NUA deed.

BigJohn
Posts: 1715
Joined: Wed Apr 02, 2014 11:27 pm

Re: Does my non-NUA plan make sense?

Post by BigJohn » Mon Apr 22, 2019 2:19 pm

I agree with your analysis and comments above. I pulled out NUA stock before rollover but only to the extent that the cost basis (about 20% of market value) was covered by after-tax contributions.

Topic Author
Into the Woods
Posts: 9
Joined: Fri Apr 12, 2019 11:16 am

Re: Does my non-NUA plan make sense?

Post by Into the Woods » Mon Apr 22, 2019 4:22 pm

Thanks all, appreciate your insights. Ah, so that’s why someone would do after tax 401k contributions, wish our company had enlightened us on that. :shock: No matter, still looks like it’s straight rollover time. Thanks again for taking the time, this has all been quite informative, so glad to have run across this forum.

sawdust60
Posts: 211
Joined: Tue Jul 17, 2018 12:06 pm

Re: Does my non-NUA plan make sense?

Post by sawdust60 » Tue Apr 23, 2019 2:14 am

Remember that it is not all or nothing. Get a schedule which shows the basis for those shares with lower cost basis. Do NUA for some. Roll the balance. And perhaps wait until the next year(s) to sell and utilize some 0% tax rate on some LTCG.

Be careful. NUA has strict rules on the timing; don't take any distributions until you have it figured out. And complete the 401k rollover and NUA within a single tax year, by year-end.

One other thing, NUA shares don't get a basis step up for heirs.

You might do some modeling. With RMD and SS and other income, your marginal tax rate could be 22.2% while you are in the 12% tax bracket. If you don't need to keep income low for ACA subsidy, Roth conversions can be worthwhile at 22% -- whether to avoid IRMAA or to benefit heirs.

Topic Author
Into the Woods
Posts: 9
Joined: Fri Apr 12, 2019 11:16 am

Re: Does my non-NUA plan make sense?

Post by Into the Woods » Tue Apr 23, 2019 10:13 pm

Thanks for that Sawdust60, much to think about!

Post Reply