Anybody know about net unrealized appreciation???

[Texas Proud]

OK... here are the basics that I know of...

Distributions of employer stock from 401k Plans


In some cases, stock in an employer has been acquired as a result of a distribution from a 401k Plan that is a Net Unrealized Appreciation (NUA) distribution. In this situation, you pay ordinary income tax at the time of the distribution only on the original cost of the company stock inside the 401k plan. You then pay capital gains tax on the appreciation only when you sell the shares.

Now.... I just sent a request to my 401(k) provider and was told that I do not own any shares in the company.... that it is a 'fund' of shares in the company...

SOOOO, it looks like they do not know anything about this law and I might not be able to get my tax savings that I had been planning for for many years...

Does anybody know if I can do it on my own IOW, if I can get the shares distributed, can I put down on the tax return what I really would owe or have to put down what THEY say my distribution is

I will be pretty pissed if I miss out on this tax savings... I probably have $50K or more in gains that I could convert... so not a small issue for me...

 

[gcgang]

I had a friend do NUA several years ago. As I remember, his 401k custodian had a record for specific share purchases, could identify which shares were being NUA'd, and then reported the tax info on the distribution. I don't think you can "do on your own".

Sounds like you never owned shares, but you owned a fund that owned shares. Not sure if NUA only applies to stock, not funds.

You could be SOL.

 

[clifp]

I know when I left Intel I took advantage of the NUA law to save myself a modest amount of taxes, but nothing like 50K. Sadly my memory of the law is so vague, it would worse than useless me giving you any advice :-(.


Have you tried posting on Fairmark.com. They have some real experts over there.

It is certainly worth raising a stink about it and raising hell with the 401K plan provider and who ever in HR is in charge of administrating it. This is basically a low cost way for employers to help their employee save for retirement and pretty inexcusable that they are unaware of the law.

 

[panacea]

I had a friend do NUA several years ago. As I remember, his 401k custodian had a record for specific share purchases, could identify which shares were being NUA'd, and then reported the tax info on the distribution. I don't think you can "do on your own".

Sounds like you never owned shares, but you owned a fund that owned shares. Not sure if NUA only applies to stock, not funds.

You could be SOL.

+1
This sounds correct to me. There is a difference between actual shares where cost can be provided for tax purposes and a fund that owns shares. I don't think the "fund" works. When I took the NUA treatment a while back they didn't know what I was talking about either but were able to identify cost and assist with a distribution so I could take it from there from an investment and tax standpoint. Sorry, wish I could offer something more positive.

 

[MRG]

+1
This sounds correct to me. There is a difference between actual shares where cost can be provided for tax purposes and a fund that owns shares. I don't think the "fund" works. When I took the NUA treatment a while back they didn't know what I was talking about either but were able to identify cost and assist with a distribution so I could take it from there from an investment and tax standpoint. Sorry, wish I could offer something more positive.

This (unfortunately) agrees with my knowledge. At one time Megacorp was hading out shares in an account. These were eligible for NUA. They also had a fund based on Co. Stock that I could buy into with 401k contributions. These shares were not eligible for a NUA.

Do you have the description available to you, if it's xyz company stock fund, I doubt you'll be able to do a NUA on it.
MRG

 

[scrabbler1]

I used NUA back in 2008 when I left my former company. I saved a boatload in taxes because most of the gain in the company stock's value was NUA and it was subject to LTCG rates (15% at the time). There is a time limit on doing this but because I did it immediately that was not an issue. This was a key part of my ER plan back in 2008.

My company gave out lots of literature on the rules for this and how to do it. I don't have much if any of it any more.

 

[pb4uski]

The post make me wonder if the "fund" that owns Mega shares might be able to distribute Mega shares to you for the value of your interest in the fund and if that might make be able to be treated as NUA for tax purposes. Probably not, but perhaps worth thinking about especially if you have enough juice to push for action if it does work.

As always, YMMV.

 

[Texas Proud]

Thanks for the responses...

First, I have $50K plus of gain.... it is not my tax savings...

It is a fund of company stock... the price of the fund is about 1/5th of actual shares.... however, they do put on the stmt the equivalent number of shares it represents... and I think that I actually vote those shares (but, I could just be voting on my fund to vote the real shares)...


I was not planning on taking out the shares anytime soon.... but just wanted to know my gain as of now.. so I have time to do research...

However, if I cannot do what I want.... I might as well move the account to Vanguard and get into some lower cost funds... (I guess I should look at the cost of the ones I have... I have not looked in a long time)....

 

[Texas Proud]

The post make me wonder if the "fund" that owns Mega shares might be able to distribute Mega shares to you for the value of your interest in the fund and if that might make be able to be treated as NUA for tax purposes. Probably not, but perhaps worth thinking about especially if you have enough juice to push for action if it does work.

As always, YMMV.

LOL!!! This is a big mega... I have ZERO juice.... but I am going to be pushing them... it is worth it to me to become a nuisance and go up the food chain to someone with knowledge...

 

[rbmrtn]

Check your plans SPD for info. I had not really looked before ( so you made me look ). It has a section on receiving company stock in leu of cash, then another section it mentions NUA

Receiving XYZ Stock
If you receive shares of XYZ Stock as part of your distribution, you may also wish to consult your financial
or tax adviser to determine if you may defer tax on such distribution by excluding “net unrealized
appreciation” on such shares from your income. In general, net unrealized appreciation is the difference
between the market value of the shares on the date of distribution and your cost for the shares.

Is it possible one could convert the entire 401k to company stock, take the distribution in company stock and use the NUA taxation ? Had really thought about it...

 

[Texas Proud]

Check your plans SPD for info. I had not really looked before ( so you made me look ). It has a section on receiving company stock in leu of cash, then another section it mentions NUA

Receiving XYZ Stock
If you receive shares of XYZ Stock as part of your distribution, you may also wish to consult your financial
or tax adviser to determine if you may defer tax on such distribution by excluding “net unrealized
appreciation” on such shares from your income. In general, net unrealized appreciation is the difference
between the market value of the shares on the date of distribution and your cost for the shares.

Is it possible one could convert the entire 401k to company stock, take the distribution in company stock and use the NUA taxation ? Had really thought about it...

The problem with your last stmt is that there would be no NUA on shares bought today... unless you know someone is about to buy out the company with a 40% premium...... SOOO, not worth converting now....

 

[Texas Proud]

OK... I might be in luck... I still have not found the real plan docs of my 401(k).... but did download PDF for people retiring... it said that you could get your shares from the stock fund in cash, shares or a combination...

SOOO, I think there has to be something in the docs that allow for what I want... I just do not know how much NUA I really have....

 

[pb4uski]

If you're right, it is appalling that the 401k administrator didn't know that.

 

[clifp]

OK... I might be in luck... I still have not found the real plan docs of my 401(k).... but did download PDF for people retiring... it said that you could get your shares from the stock fund in cash, shares or a combination...

SOOO, I think there has to be something in the docs that allow for what I want... I just do not know how much NUA I really have....

Well if you can get actually shares distributed instead of cash, then you are 80% of the way there. Even if the 401K plan administrator doesn't have the basis information. You can take the shares and then make a good faith effort to estimate the basis. Presumably the shares were part of employee profit sharing/pension plan and credited to your account on annual or quarterly basis. It should not be too hard to reconstruct to how many shares you received for each year and figure out the FMV for each batch of shares.

Of course, it is info the plan should have but...

 

[Texas Proud]

If you're right, it is appalling that the 401k administrator didn't know that.

I agree!!! Someone with less gumption might have said "OK" and done something that could have cost them money...

Well if you can get actually shares distributed instead of cash, then you are 80% of the way there. Even if the 401K plan administrator doesn't have the basis information. You can take the shares and then make a good faith effort to estimate the basis. Presumably the shares were part of employee profit sharing/pension plan and credited to your account on annual or quarterly basis. It should not be too hard to reconstruct to how many shares you received for each year and figure out the FMV for each batch of shares.

Of course, it is info the plan should have but...

I agree in principle.... but the problems can be quite large... say I take the shares and they send a 1099 for the full value... the IRS will be expecting their cut... it would be hard to prove my point and the cost to me if I am wrong is not small...

And we are talking about going back more than 20 years to get the records... I was putting money in each paycheck.... and I actually traded the shares are one point since the shares were going up and down in a bracket for awhile... and lastly, I sold everything around the year 2000 after the stock crashed and bought it all back to change my basis (I am hoping that it worked, which means I only have to go back to 2000).... still, it should be the plan that does this work..... not me...


This is my point... I am asking the plan to DO this work now so I can make a decision to keep holding this investment or just roll it over to Vanguard to close out another account...

 

[gerntz]

Here's a good article on NUA:

Planning With Employer Stock In A Qualified Plan

Also note Partial Rollover section - which is what I did.

 

[gauss]

One thought that comes to mind is doing a small partial distribution the first year. That way you can work the process all the way through to completion the following year when you file tax return. If everything seems to check out to your satisfaction, you could do a larger distribution in following years.

Please note that this scenario has two caveats.
#1) That your employer will allow partial distributions

#2) That taking a partial distribution will not make things more complicated (I have not researched this so it is up to you to do).

Just thinking out loud

-gauss

 

[Texas Proud]

One thought that comes to mind is doing a small partial distribution the first year. That way you can work the process all the way through to completion the following year when you file tax return. If everything seems to check out to your satisfaction, you could do a larger distribution in following years.

Please note that this scenario has two caveats.
#1) That your employer will allow partial distributions

#2) That taking a partial distribution will not make things more complicated (I have not researched this so it is up to you to do).

Just thinking out loud

-gauss

Thanks for the thought... I will do some research on partial distribution, but I do not think that is allowed...

But my thinking is that I want to have someone at the administrator give me (in writing) that what I want to do is what they are going to do and agree with it... But if there are partial distributions, it would help on planning for taxes....

 

[Texas Proud]

Well, good news....

But first, thanks for all the comments...


The news...

The DO have my cost basis...

Better news....

My unrealized gain is more than I thought!!!!


Even better news....

It looks like I can do partial distributions!!!!


So, in a few years instead of converting 401(k) month into ROTH.... I will be taking out stock at cost and I do not have to take the full hit in one years

 

[pb4uski]

Wow!!!! Hope you bought a lottery ticket today given your luck!!!

 

[gcgang]

Careful. I think NUA only applies if you do what IRS defines as a lump sum distribution.

 

[Texas Proud]

Careful. I think NUA only applies if you do what IRS defines as a lump sum distribution.

Thanks... I will look into this...


I will have to find out if they mean 100% of the account, or something else.... but, I will do it right...

 

[panacea]

Wow, that's great news! Sounds like a great opportunity. Just had one other thought... if you're under 59 1/2 I'm pretty sure the distribution is subject to a 10% penalty. Don't know how old you are and I'm not saying it's still not worth taking the NUA treatment... just a thought.

 

[scrabbler1]

Wow, that's great news! Sounds like a great opportunity. Just had one other thought... if you're under 59 1/2 I'm pretty sure the distribution is subject to a 10% penalty. Don't know how old you are and I'm not saying it's still not worth taking the NUA treatment... just a thought.

I did not know this at the time but learned it as I was preparing my income tax return the following year: The 10% penalty applies only to the cost basis of the company stock, not the NUA itself. This was a hugely pleasant surprise for me because the NUA in my case was about $288k and the cost basis was about $10k, making the penalty only $1k, not $30k.

The presence of the large NUA, even though it was taxable at the 15% LTCG rate (this was back in 2008, before it got raised for higher incomes), triggered the AMT for the relatively small remainder of my income, costing me about $5k more in federal income taxes. Still a mere bag of shells compared to the $29k of "found" money from not paying any 10% penalty on it.

 

[gerntz]

Careful. I think NUA only applies if you do what IRS defines as a lump sum distribution.

Yep, that's what the article I linked points out:

"IRC section 402(e)(4)(A) provides a special rule for a distribution from a plan that includes employer stock. In order to qualify for this special treatment, the payment must be a lump-sum distribution as prescribed by IRC section 402(e)(4)(D). The NUA on employer stock is not taxed when the stock is distributed. Rather, it is generally taxed at long-term capital gain rates when the stock is sold ....."