rollover basis when taking NUA distribution?

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Topic Author
sorcabul
Posts: 93
Joined: Mon Apr 19, 2010 5:03 pm

rollover basis when taking NUA distribution?

Post by sorcabul »

I'm retiring at 56 at the end of the year.
In my 401k, I have 170k in my company's stock, with a 140k basis.

This article https://www.bogleheads.org/wiki/Net_unr ... preciation states:

The following advanced considerations concerning NUA require the aid of a professional retirement plan specialist:
  • Rolling over the employer's basis in the plan and taking distribution of only the NUA.

The 401k's NUA Specialist said there's no way to take distribution of the NUA paying capital gains tax only, while rolling the basis into a retirement account and avoiding (current year) tax.

Which is true?
Topic Author
sorcabul
Posts: 93
Joined: Mon Apr 19, 2010 5:03 pm

Re: rollover basis when taking NUA distribution?

Post by sorcabul »

<crickets>
RyeBourbon
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Re: rollover basis when taking NUA distribution?

Post by RyeBourbon »

My understanding is that you must pay tax (as income) on the basis.

Have you considered asking a professional retirement plan specialist?
Topic Author
sorcabul
Posts: 93
Joined: Mon Apr 19, 2010 5:03 pm

Re: rollover basis when taking NUA distribution?

Post by sorcabul »

Have you considered asking a professional retirement plan specialist?
I'd hoped one would reply to this post. :happy

The that part of the wiki article was added by Blbarnitz in 2008, but I don't see a user by that name now.
https://www.bogleheads.org/w/index.php? ... oldid=5946
Geologist
Posts: 2015
Joined: Fri Jan 02, 2009 7:35 pm

Re: rollover basis when taking NUA distribution?

Post by Geologist »

You can roll employer stock into an IRA and then it becomes an IRA asset like any other. NUA then becomes irrelevant.

There is no way to somehow “only pay capital gains tax” presumably on the difference between market and the basis while putting the basis in an IRA.

If you want to take advantage of NUA, then the stock goes into a taxable account and you owe ordinary income tax on the basis (140k in your example). You would then have unrealized capital gains on the difference between the basis and market value and that wouldn’t become taxable until you sell the stock.

(Overall, then, it sounds like the NUA specialist is describing it right.)

Alan S., who often posts here, typically explains that NUA is not worthwhile unless the basis is a low percentage (less than 30% or so) of the market value.

Depending on your employer, it might be possible to use NUA for some of the shares but only if the employer uses specific cost basis for each acquisition.
Geologist
Posts: 2015
Joined: Fri Jan 02, 2009 7:35 pm

Re: rollover basis when taking NUA distribution?

Post by Geologist »

Here are some excerpts from Fidelity’s webpage on NUA:

“NUA is the difference in value between the cost basis of company stock and its market value at the time it is distributed in kind from a plan as part of a lump-sum distribution….

Usually the pretax portion of what your client paid for the stock (cost basis) is taxable as ordinary income in the year it is distributed in kind to them and may also be subject to a 10% penalty if they are under age 59½....

Under the NUA rules, your client can elect to defer taxes on the NUA until the time they liquidate the stock. Regardless of how soon they sell the stock after they receive it in kind, the NUA should be taxable as long-term capital gains."

I have no opinion on whether you would be subject to the penalty given that you are under 59.5 years of age.

Fidelity's webpage:

https://institutional.fidelity.com/app/ ... n-nua.html
Alan S.
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Re: rollover basis when taking NUA distribution?

Post by Alan S. »

This is known as the "Frank Duke" method and has been attempted a few times over the last 4 decades.
Most likely the IRS would not approve such a transaction if they understood what the tax reporting was telling them. The general consensus is that each share of employer stock contains some cost basis and some NUA, and that the cost basis of any share cannot be separated from the NUA by assigning some shares as entirely cost basis and others as entirely NUA.

For those interested enough to dig deep into the weeds, the following is a 2012 thread from the Ed Slott site discussing the "Frank Duke" method, and various related IRS PLRs. Bottom line, this has been tried before, and is a high risk aggressive strategy.

https://www.irahelp.com/forum-post/17504-nua-lsd-401k
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