Do I lose NUA if I quit my job?

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Carbonate24
Posts: 51
Joined: Sun Mar 12, 2017 8:19 pm

Do I lose NUA if I quit my job?

Post by Carbonate24 » Wed Oct 11, 2017 12:16 pm

I’ve been studying posts about the pros/cons of NUA (Net Unrealized Appreciation) in a 401(k), but there is one Q&A topic I have not come across yet, so seeking input for anyone that knows.

Background: I have a 401(k) comprised of about 80% index funds and 20% company stock. I am 47 and I plan to retire at about 60, though I am flexible on retirement age as I do have a comfortable amount of non-401(k) assets (IRA, investment accounts)

Question: I understand how using NUA would work if I retire from my company. But what if I resign? If I were to resign in 2018, do the tax rules still allow me the flexibility to maintain the NUA benefit?

I realize the NUA is not a slam-dunk…..paying ordinary tax on the cost basis immediately vs diversifying now/roll to IRA/defer tax, etc. Just trying to isolate the impact of quitting on keeping/losing NUA option.

scrabbler1
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Joined: Fri Nov 20, 2009 2:39 pm

Re: Do I lose NUA if I quit my job?

Post by scrabbler1 » Wed Oct 11, 2017 12:38 pm

The rules about how company stock can be treated when leaving a job may be specific to the company's plan. However, I can tell you that when I left my company back in 2008 (not a retirement, but a resignation from the company's perspective; I was only 45), I was able to cash out the company stock using NUA which comprised about 97% of the stock's value. I paid only 15% (LTCG rate) on that NUA and it was not subject to the 10% penalty for early withdrawal. The 10% penalty applied only to the tiny cost basis, something I didn't know and was never made totally clear until I was doing my taxes in early 2009. That was a very pleasant surprise, and I made sure to mention it to my HR contact at my (old) company so they could add it to their pamphlets about the Plan's rules.

There was a time window for doing this NUA thing, maybe 60 days. But I did this immediately upon leaving the company because I wanted to get this large chunk of money working for me in some investments I had already planned out as part of my (very) early retirement. Had I been older, perhaps at least 55, I would have had some more options, perhaps some which would have avoided any additional tax penalties.

I had a 401k with my old company and did a direct rollover (trustee-to-trustee) into an IRA of all the pretax contributions, company matching funds, and all untaxed earnings in the 401k, so there was no tax liability. I happened to have a small amount of after-tax contributions and this was my chance to take them out in one shot also without any tax liability. I used this cash to pay some of the taxes incurred by cashing out the company stock.

Carbonate24
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Re: Do I lose NUA if I quit my job?

Post by Carbonate24 » Wed Oct 11, 2017 12:58 pm

Thanks, very helpful scrabbler1. I didn't anticipate the possibility that the plan design might impact the answer. I assumed only IRS rules would drive the outcome.

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One Ping
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Re: Do I lose NUA if I quit my job?

Post by One Ping » Wed Oct 11, 2017 3:00 pm

Carbonate24 wrote:
Wed Oct 11, 2017 12:58 pm
Thanks, very helpful scrabbler1. I didn't anticipate the possibility that the plan design might impact the answer. I assumed only IRS rules would drive the outcome.
This is very true. My megacorp plan allowed certain things to be done at retirement and not others. Drove a colleague of mine nuts when he retired. He wanted to do things the plan didn't allow and was NOT happy when told he couldn't because, even though the IRS allowed it, the plan didn't. :twisted: :oops:
"Re-verify our range to target ... one ping only."

bikechuck
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Re: Do I lose NUA if I quit my job?

Post by bikechuck » Wed Oct 11, 2017 3:24 pm

I worked for a Megacorp that I left 30 years ago and kept money in their retirement plan including company stock. Next year (my first full year of retirement) I plan to close that retirement plan rolling the non company stock investments into an IRA and rolling the company stock into a brokerage account whilst taking advantage of the NUA rules.

It is my understanding that I can do this and that next year I will then pay ordinary income tax on the basis of the stock and then capital gains when I sell the shares. I plan to gradually sell the shares over a two to three year period as I no longer want to own that stock.

BigJohn
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Re: Do I lose NUA if I quit my job?

Post by BigJohn » Wed Oct 11, 2017 3:52 pm

Here are the IRS requirements for using NUA from this source https://www.fidelity.com/viewpoints/per ... pany-stock
You must meet all four of the following criteria to take advantage of the NUA rules:

1) You must distribute your entire vested balance in your plan within one tax year (though you don’t have to take all distributions at the same time).
2) You must distribute all assets from all qualified plans you hold with the employer, even if only one holds company stock.
3) You must take the distribution of company stock as actual shares. You may not convert them to cash before the distribution.
4) You must have experienced one of the following:
+ Separation from service from the company whose plan holds the stock (except in the case of self-employed workers)
+ Reached age 59½
+ Total disability (for self-employed workers only)
+ Death
As long as your plan rules allow you to meet all four requirements you should be able to use NUA.

Carbonate24
Posts: 51
Joined: Sun Mar 12, 2017 8:19 pm

Re: Do I lose NUA if I quit my job?

Post by Carbonate24 » Wed Oct 11, 2017 4:23 pm

Thanks to all.... helpful. I will need to check my plan rules. I suspect they might not want to give me the shares of stock if I quit, rather just the cash. It's a bit tricky since the rules are easy to get in Summary Form, but much harder to get in official/legal/long form. Eventually, I probably have to ask HR or plan administrator "will you give me shares if I quit", which has the potential to raise flags.

scrabbler1
Posts: 2004
Joined: Fri Nov 20, 2009 2:39 pm

Re: Do I lose NUA if I quit my job?

Post by scrabbler1 » Wed Oct 11, 2017 5:04 pm

I mentioned that I cashed out my company stock. The plan rules (at the time) stated that I would (1) take the shares of stock then (2) sell them back to the company within a given time frame. For me, the effect of those two rules was to cash out the shares immediately. At the time, my company was not traded publicly, so only employees could own shares. Now, they are publicly traded, so that sell-back rule no longer exists.

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