Net Unrealized Appreciation (NUA) Option for Rollover

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careerdata
Posts: 30
Joined: Sat Sep 09, 2017 7:12 pm

Net Unrealized Appreciation (NUA) Option for Rollover

Post by careerdata » Sun Apr 08, 2018 9:01 pm

Good evening!

I have one 401(k) plan from a former employer that has not been rolled over yet as I am trying to make sure I have carefully thought through the issue with a company stock position that makes up a significant percentage of our dedicated retirement savings at this time. Here are some of the particulars of our current situation:

--Ages: 52 for me (target retirement at age 67 (Year 2032); 40 for wife (target retirement at age 67 (Year 2045)
--Two children (boy age 13 in 7th grade and girl age 12 in 6th grade)
--Annual household income of $157K ($155K for me and $2K for my wife)
--Former employer stock in 401(k) is Domino's Pizza (DPZ)
--As of 4/6/18 I had 400.575 units of DPZ stock worth $101.2K in the 401(k)
--The cost basis on the DPZ stock in the 401(k) is $6.8K
--The current DPZ stock position makes up approximately 20% of our total 401(k) / 403(b) balance of $504.6K
--Other assets are as follows:

$68K Roth IRAs ($34K for me and $34K for my wife)
$6.8K TIAA Annuity
$6.8K HSA
$1.3K vested monthly defined benefit pension (my current employer)
$7.7K Bank of America savings account
$10.5K Fidelity brokerage account (Money Market Fund)

--Current Debt:

$39.2K Personal Loan (26 monthly payments of $1.5K remaining) (Final loan payment on 6/1/2020)
$12.1K Credit Cards

--Current Vehicles (both loans paid off but how long can we keep them running?):

2008 Honda Odyssey
2010 Honda CRV

--Monthly Apartment Rent & Storage

$1.4K

The Fidelity rep I am working with to reorganize our assets to be prepared for retirement as well as more near-term expenses (braces for the kids, first-time home purchase, potential replacement of aging vehicles, and college education for my wife and our two kids) has suggested I give some consideration of completing the following transaction prior to the upcoming tax deadline:

--Do an in-kind transfer of the DPZ company stock position to our Fidelity brokerage account to take advantage of the net unrealized appreciation option available to company stock where the tax and penalty would apply to the cost basis of $6,873.32.
--Roll over the rest of the 401(k) to my active employer plan to keep "the decks clear" for a few years down the road when our household income is expected to increase as my wife completes her nursing program. At that time our combined income could potentially be above the IRS limits to do direct Roth IRA investments and thus we may have to go the non-deductible TIRA-to-Roth IRA conversion route. With his assistance we converted all our TIRA balances to our Fidelity Roth IRA last week.
--Use some of our current emergency funds in the Fidelity brokerage account to fully-fund Roth IRAs for tax year 2017 ($6,500 for me and $5,500 for my wife). In a pinch we could sell off some of the DPZ stock or use or Roth contributions and gradually rebuild the cash position we have currently. In this way we would be more fully invested in the market but with ready access within a couple of days to funds if needed.
--Gradually reduce DPZ company stock exposure over time by selling off enough shares to fully fund Roth IRAs for both me and my spouse each year or until the personal loan is paid off.
--Potentially set a stop-loss price for the DPZ stock holding once in the brokerage account.

I have been talking to my wife this weekend about some of the pros-and-cons of doing such a move. She likes the idea of being able to fully-fund the Roth IRAs at least until we can pay off the personal loan in 2020 but she is not as concerned as I am about the exposure to DPZ stock. She asked me to look up some of the performance numbers and here is what Fidelity shows for average annual returns as of 4/16/18:

10 Year = 33.92%
5 Year = 35.34%
3 Year = 32.46%
1 Year = 26.94%
2018 YTD = 21.89%

That is without a doubt excellent current and long-term performance but we have no way to predict the future. That said we are discussing keeping some portion of the original DPZ holding for the longer term as we will free up $18K per year that is focused on paying off the remainder of the personal loan and that could be used to fund the Roths at that time. We both admit to having an emotional connection to the DPZ stock as I was working for Domino's when we married and started our family. Looking back this has been the best financial investment we have made. I would like to say this was the result of a well thought out investment strategy but in reality it was almost entirely due to neglect as we were so focused the last 10 years on the care of our autistic daughter that we did not track the old 401(k) plans as closely as we should have.

So our Fidelity rep has been encouraging me to get back on track with managing our finances and to try to remove all emotion from the analysis of our DPZ stock holding. He thinks taking this action next week to capture the NUA benefit and fully-fund the Roth IRAs will support both our near-time and long-term goals.

Has this proposed rollover been well-thought through?

Are there any unintended consequences now or in the future that would override the potential benefits of making this move next week?

Thank you in advance for taking time to consider our personal situation and provide input if possible!

Regards,

Joe

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Net Unrealized Appreciation (NUA) Option for Rollover

Post by dbr » Mon Apr 09, 2018 8:20 am

I think your advisor is making a good effort to optimize a number of factors involved with this stock. At least he understands what is involved with the concept of NUA. I guess I would be writing down what the actual tax cost now to liquidate the stock would be. If it is $15,000 or so I would compare that to the possibility of that stock losing $15k in a year might be.* Offhand I would say there is enough risk in losing more than $15,000 in a year that you would be justified in paying the tax bill to remove that exposure. Someone may have a more sophisticated analysis, and be sure to look at what it would actually cost you to do this. Keep in mind you are going to pay the taxes anyway whether this year or next or the next. You can still fund the Roths one way or another.

*Technically this should be $15k more than whatever the replacement investment might lose. That is harder to estimate. You might imagine that the standard deviation of annual returns for total stock market is 20% and for the single stock maybe twice that or something, but I really don't know.

careerdata
Posts: 30
Joined: Sat Sep 09, 2017 7:12 pm

Re: Net Unrealized Appreciation (NUA) Option for Rollover

Post by careerdata » Sun Apr 15, 2018 4:25 pm

Many thanks dbr for your reply and insight! As you can probably tell from my posts doing the right thing with regard to the company stock position and the NUA option is of great concern to me. Gathering as much insight from as many informed individuals is the only way I know how to approach such decisions. When things get complicated my wife sometimes likes to use her gut to make decisions but when it comes to money I want to feel confident that I explored all options and made the best decision for her and our kids. I know there is no guarantee that the decision made will prove over time to the best one for us but I at least want to be able to say I made the best decision available to us when the decision was made.

With the help of you and many others in the BH community since I joined last year I was able to gather enough information to complete the following on the investment cleanup checklist:

--Establish an asset allocation strategy for our retirement assets that takes into consideration that I am almost 13 years older than my wife.

--Apply the asset allocation strategy to our retirement assets with a focus on index funds as opposed to actively managed funds.

--Complete TIRA-to-Roth IRA conversions so that our all our IRA balances are now in our Roth accounts.

Next up on the checklist is the roll over my Roth 401(k) from a former employer into my Roth IRA and TIRA. The Roth 401(k) contributions and earnings will go into the Roth IRA and then the employer 401(k) match and my pre-tax payroll contributions and earnings will go into now $0.00 balance TIRA. After that step is complete then I will move the balances rolled into my TIRA to my active employer 401(k) plan so that the TIRA balance is once again $0.00.

There is still a lot of thinking to do on the NUA option so after I get the Roth 401(k) rollover completed I will provide updates on the additional conversations I am having with our Fidelity advisor. Our Fidelity advisor said he has processed over 200 in-kind company stock rollovers with other Fidelity clients so he has direct experience with all the steps involved, which gives me confidence that if we go-ahead with the rollover with the in-kind company stock going into our Fidelity brokerage account that he will help make sure I check all the boxes.

Regards,

Joe

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