NUA and Vanguard Brokerage

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blacklab
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Joined: Sat Nov 12, 2011 5:15 pm

NUA and Vanguard Brokerage

Post by blacklab » Sun Nov 27, 2011 8:23 pm

Retiring shortly and have a 401(K) with substantial amount of employer stock, eligible for favorable Net Unrealized Appreciation (NUA) tax treatment. Want to transfer the stock into a brokerage account, but don't have a feeling for whether VBS is a good choice. 401 k is now with Principal, but I believe fees are higher than Vanguard. Any thoughts on Principal vs. Vanguard vs. setting up something new ?

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Archie Sinclair
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Re: NUA and Vanguard Brokerage

Post by Archie Sinclair » Sun Nov 27, 2011 9:21 pm

I'm not sure how much the the broker matters. NUA is a one-time event, where the stock is moved from your employer's 401k to a taxable brokerage account. Whether that's a good idea depends on the details of your tax situation, like how much cost basis you have in the stock, not so much the identity of the broker.

If you do choose to take advantage of NUA, your question then becomes a fairly ordinary one: which broker is best for the taxable investments that you want to hold afterward? If your plan is to sell the company stock after the transfer and buy Vanguard ETFs, then Vanguard is a fine choice.

scrabbler1
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Re: NUA and Vanguard Brokerage

Post by scrabbler1 » Sun Nov 27, 2011 9:36 pm

Having gone through a sale of my former employer's stock using the NUA option, I can tell you that I agree with Archie Sinclair's remarks. Deciding on NUA is a decision about how to get the money. Deciding on Vanguard or Principal or someone else is a decision obout what to do with the money.

Alan S.
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Re: NUA and Vanguard Brokerage

Post by Alan S. » Sun Nov 27, 2011 10:45 pm

Note that time is getting very short to complete distribution instructions for all of your retirement plans of the same type with the employer. If the lump sum distribution is not totally complete by 12/31, ie if even one dime has not been transferred to either a retirement or taxable account by that date, the NUA benefit is lost. If there is any doubt about completing everything this year, then postpone the LSD until after the first of January.

The decision to elect NUA or not often depends on when you plan to sell the shares. Generally, if the cost basis of the shares is over 30% of the FMV, the value of NUA is diminished UNLESS you need the funds and plan to sell the shares right away. In that case, the LT cap gain rate will be much lower than the ordinary income rates you will pay if you take distributions from the plan or from a rollover IRA. On the other hand, the need to diversify should trump tax considerations, and therefore you should probably plan to sell at least a portion of the shares fairly soon. There has been too many shocking and instant meltdowns is recent years (Enron, Lehman Bros, etc).

Get a quote from the company on your cost basis %. Also, you do not have to use all the company shares for NUA if you don't want to.

Also, note that if you distribute the shares and change your mind within 60 days of receipt, you can still roll all or some over to an IRA indirectly.

Additional info on NUA:
http://spwfe.fpanet.org:10005/public/Un ... Tax-Wi.pdf

scrabbler1
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Re: NUA and Vanguard Brokerage

Post by scrabbler1 » Sun Nov 27, 2011 11:09 pm

Another thing about NUA I did not know at the time of my NUA sale of company stock was that if you have to pay the 10% tax penalty for early withdrawal (i.e. under 59.5 years old), that penalty applies only to the cost basis of the shares, not the NUA. I was pleasantly surprised by this when 97% of the value of the company stock I sold was NUA, so the 10% penalty applied to almost nothing.

Alan S.
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Re: NUA and Vanguard Brokerage

Post by Alan S. » Sun Nov 27, 2011 11:35 pm

3% cost basis is about as good as it gets.

But the early withdrawal penalty would not apply if you separated from the company holding the plan in the year you turned 55 or later. If you left the company before that year, then you would have to wait until 59.5. There is also a quirky rule about intervening distributions disqualifying your NUA. If you have a triggering event (separation from service), you cannot take a distribution from the plan in a non LSD year without having to wait until the next triggering event, which would be reaching 59.5. But you don't have to worry about that if the first distribution you take is in your LSD year or is the LSD itself.

Topic Author
blacklab
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Joined: Sat Nov 12, 2011 5:15 pm

Re: NUA and Vanguard Brokerage

Post by blacklab » Mon Nov 28, 2011 8:02 pm

Just getting back to my original (first time) post now. I agree there were really 2 separate issues.In my case taking the NUA is pretty clear as the cost basis is even lower than 3% at this time. I will be separating after first of year so all distributions will be in 2012. Thanks to all for the prompt, thoughtful responses.

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