NUA Tax Strategy - $88k / year

[mmgoebe]

Hi,
Has anyone encountered a tax strategy where you keep your retirement taxable income below $88k / year, and you are thereafter allowed by the IRS to cash in any NUA stock at a "zero" capital gains tax ? The strategy suggests that if you need more than $88k, you supplement the $88k with NUA stock sales. Looking for any additional insight. Thanks - Mike G.

[Animorph]

Sounds like it's using the 0% cap gains tax in the bottom two tax brackets (which may only be available for the next two years) to get "tax-free" NUA stock sales. The NUA stock would be company stock held in a 401k and then distributed in-kind to a taxable account (http://www.investmentnews.com/articl.../REG/309279982). Income taxes are due on the stock basis when the distribution is made. After that you pay only cap gains when the stock is sold, so that part works for any taxable stock. The top of the 15%/0% CG tax bracket is $69k for 2011 filing jointly, so maybe they added exemptions and deductions to get $88k? Also, the capital gains would contribute to that $88k limit, so you'd have to leave room for them to make it work.

That sound about right? Seems like some really specific requirements and maybe a very limited timeframe for peak efficiency.

Many of us will be taking 401k/IRA withdrawals/Roth conversions and cap gains if applicable to fill the lower tax brackets while our incomes are low. I think that's the basic approach being touted, with the NUA stock thrown on top. I'll have a few years of zero income during which I'll convert IRA funds to Roth funds and pay for it with taxable stock sales while staying within the 15% tax bracket.

[chinaco]

NUA can benefit certain people. It all depends on the specific situation of the person. IMO - If one is not familiar with all details, they should consider consulting a Planner or CPA with experience in the matter.

The decision about NUA can be tricky and all options and specific issues should be considered.

Here a some things to ponder:

1. The 10% penalty for early withdrawal of tax deferred accounts at ages below 59.5.
2. Once the NUA move is done, the assets will no longer be in a tax deferred account. Depending on one's marginal income tax rate (or the ability to manage it), they might be better off rolling the assets to a Roth IRA and not encumbering future taxes (assuming the money will not be spent immediately).
3. AFAIK a taxable account is generally not shielded from creditors (e.g., bankruptcy). Qualified Tax Deferred accounts have varying degrees of legal asset protection from creditors.

When I did our analysis, because of our situation, I decided that we will be better off if we roll the assets to a Roth IRA for tax purposes and asset protection. We will ER and for several years be living off of a taxable account (for a large portion of our income). Those assets already have a large tax basis (because of security sales over the last decade... for many reasons... prep for ER, time to sell certain securities, etc). In our early retirement years (beginning in mid 50's), we will be spending money from the taxable account. This will enable us to roll a significant amount from tax deferred accounts into Roth IRAs and manage our marginal income tax rate (keep it low). We intend to do the Roth rollovers in steps over 10 to 15 years before RMD is required.

Of course, your situation may be different.

IMO - if one is holding a significant amount of their wealth in one company's stock... taxes are a lesser concern. Lack of diversification might be a much bigger threat to one's financial well being. People may be constrained by certain rules depending on their emplyer's plan... but my primary goal would be diversification (to minimize risk) rather than tax optimization (although managing both would be optimum). I was told by a CFP (from a large investment bank) that I should not hold more that 10% maybe 15% in any one company.... especially if that company is the one that I earn my paycheck from!! (i.e., don't put too many eggs in one basket).

[gerntz]

Concerning NUA, you can "dodge" the taxes on the basis even under 55. How?

1. You must take a LSD from your company retirement account. Do not sell the stock.
2. Anything not in company stock roll directly into an IRA from the retirement account. Of course you can take the distribution of this non-company stock & roll it into an IRA at no taxes ultimately, but it's messier.
3. Here's the somewhat tricky part: For the company stock, take it all as a distribution, do not roll directly into IRA, do not sell it (If you do either, you've screwed it up.). Turn around and immediately (within 60 days) take the number of shares equal to or greater in value than the basis cost of the stock and roll that into an IRA. In that way, all stock that was bought remains still in a retirement account - no distribution taxes, no penalty. The remaining stock outside of retirement accounts is not subject to penalty, it's not taxable as a distribution - it's the entire NUA. You do have to pay taxes on future dividends. Also, because you kept the entire cost basis of the stock in a retiremnt account, the stock in hand now has zero basis cost & is subject to capital gains taxes on the whole amount when sold. Of course if you don't sell it, if you gift any of it, no taxes on it either.

[ziggy29]

Quote:

Originally Posted by gerntz 1. You must take a LSD from your company retirement account. Do not sell the stock.

I first read this as "you must take LSD". Need more coffee.

[mmgoebe]

Guys, Thanks for the insight. It appears the value of the NUA component needs to placed precisely into a separate bucket, and therafter, keep the tax bracket low when eventually pulling the trigger on cashing in on the NUAs. Directionally, current plan is to ER, bridging until age 59.5 with an external taxable account, before withdrawing any 401k / IRA monies. (I do suffer severely from holding too much of a single company stock - need to reallocate very soon) -Mike G.

[scrabbler1]

I cleaned up on the NUA benefit when I cashed out my company stock (from the 401k savings plan) after I ERed back in 2008. Because 97% of my company's stock value was NUA, I paid only the 15% LTCG tax rate on nearly $300k. The 10% early withdrawal penalty was applicable only to the par basis, not the NUA (I did not know that at first, what a huge sigh of relief when I discovered that). The NUA did trigger AMT on the rest of my rather small income, along with limitations on my itemized deduction and personal exemption. But all of that was small potatoes compared to the NUA.

The rest of my 401k, which had to be emptied, I rolled the pretax contributions and all tax-deferred earnings into an IRA while taking as cash the small amount of after-tax contributions (no taxes due for either one).

[gerntz]

Quote:

Originally Posted by mmgoebe Guys, Thanks for the insight. It appears the value of the NUA component needs to placed precisely into a separate bucket, and therafter, keep the tax bracket low when eventually pulling the trigger on cashing in on the NUAs. Directionally, current plan is to ER, bridging until age 59.5 with an external taxable account, before withdrawing any 401k / IRA monies. (I do suffer severely from holding too much of a single company stock - need to reallocate very soon) -Mike G.

Not sure of everything you're saying, but

- I'm assuming the company stock with NUA is in the 401k. You don't say. If so (The following in my understanding, not a legal opinion.),

- You cannot diversify from the employer's company stock in the 401k & retain the NUA. That only applies to the stock. Once the stock is gone, NUA is gone.

-to use the NUA on your former employer's company stock, have to take lump sum distribution of stock along with any and all other 401k assets (But those other assets can be rolled directly to an IRA.). Transfer the stock directly to an IRA without taking stock distribution directly to you & goodbye NUA.

- I don't see what's stopping you from taking the lump sum distribution at any age after separation from the employer as long as the basis cost of the stock is placed in an IRA - within 60 days after distribution directly to you - as stock of equal value to the basis cost, and all other assets are rolled to an IRA. There is not a penalty for this that I know of. Now you have the zero basis cost stock out of the retirement account & you can sell it when you want & thus take the capital gains when you want. Nothing says you have to spend it.

[gerntz]

Quote:

Originally Posted by scrabbler1 I cleaned up on the NUA benefit when I cashed out my company stock (from the 401k savings plan) after I ERed back in 2008. Because 97% of my company's stock value was NUA, I paid only the 15% LTCG tax rate on nearly $300k. The 10% early withdrawal penalty was applicable only to the par basis, not the NUA (I did not know that at first, what a huge sigh of relief when I discovered that).

Had you deposited stock equal to that par basis in an IRA within 60 days of taking the stock distribution, there would have been no penalty to pay since you would have rolled that basis cost or par basis over.

[boutros]

Quote:

Originally Posted by gerntz Concerning NUA, you can "dodge" the taxes on the basis even under 55. How? 1. You must take a LSD from your company retirement account. Do not sell the stock. 2. Anything not in company stock roll directly into an IRA from the retirement account. Of course you can take the distribution of this non-company stock & roll it into an IRA at no taxes ultimately, but it's messier. 3. Here's the somewhat tricky part: For the company stock, take it all as a distribution, do not roll directly into IRA, do not sell it (If you do either, you've screwed it up.). Turn around and immediately (within 60 days) take the number of shares equal to or greater in value than the basis cost of the stock and roll that into an IRA. In that way, all stock that was bought remains still in a retirement account - no distribution taxes, no penalty. The remaining stock outside of retirement accounts is not subject to penalty, it's not taxable as a distribution - it's the entire NUA. You do have to pay taxes on future dividends. Also, because you kept the entire cost basis of the stock in a retiremnt account, the stock in hand now has zero basis cost & is subject to capital gains taxes on the whole amount when sold. Of course if you don't sell it, if you gift any of it, no taxes on it either.

I am very familiar with NUA transactions and my understanding is that the 60 day rollover of the basis leaving 0 basis employer stock in the taxable account is not allowed. I would certainly work with a good accountant or financial planner if you intend on following through with this course of action. Further I would want to see the tax code or a private letter ruling that allows it. Otherwise the IRS could ding you with a disallowed transaction and your entire IRA could be deemed as distributed (unlikely but severe consequence)

[scrabbler1]

Quote:

Originally Posted by gerntz Had you deposited stock equal to that par basis in an IRA within 60 days of taking the stock distribution, there would have been no penalty to pay since you would have rolled that basis cost or par basis over.

I did not know that it was allowable to split up the company stock distribution this way. Too bad I did not know about this forum (and you in particular) when I was going through this. Nothing in my company literature about the ESOP specifically indicated this option. (Then again, nothing in there mentioned the 10% tax penalty not applying to the NUA portion, something I told my HR contact months after I left at tax time.) But I see your reasoning given that I was already rolling the 401(k) portion directly into an IRA; nothing would have stopped me from simply writing a personal check for another $9k and indicating on my tax return how I used the par-basis funds this way - I already included a statement describing what I did with each part of the 401(k) and ESOP distribution as shown on the two 1099-R forms. That small portion of the ESOP distribution was taxed pretty heavily, at nearly 50%, when you factor in AMT and state income taxes. Oh well.

[gerntz]

Quote:

Originally Posted by boutros I am very familiar with NUA transactions and my understanding is that the 60 day rollover of the basis leaving 0 basis employer stock in the taxable account is not allowed. I would certainly work with a good accountant or financial planner if you intend on following through with this course of action. Further I would want to see the tax code or a private letter ruling that allows it. Otherwise the IRS could ding you with a disallowed transaction and your entire IRA could be deemed as distributed (unlikely but severe consequence)

First off, I did this many years ago. I know 10's of people who also did it. I did work through a CPA. I judge him as good. But I know others of the 10's who did it on their own.

Read this article from "The CPA Journal", May, 1999 issue:

Planning With Employer Stock In A Qualified Plan

"Partial Rollover
An alternative to the direct rollover to an IRA is to elect a lump-sum distribution and then roll over the distribution into an IRA except for shares having a fair market value equal to the NUA. Under IRC section 402(c), there would be no tax at the time of distribution. However, assets that are rolled over into the IRA would be subject to the minimum distribution requirements beginning no later than April 1 of the year following the year in which the employee reaches age 70zs.
Any amounts remaining in the IRA at death would be IRD. It is not necessary for the IRA to continue to hold employer stock, as there is no NUA associated with the rollover. Accordingly, from a financial planning perspective, diversification of the portfolio can be partially accomplished through the IRA with no tax until distribution. The beneficiary of the IRA would pay tax on the fair market value of the amounts received from the IRA at ordinary income tax rates."

So not rolling over shares after distribution equal to the NUA is the opposite way of saying to rollover the shares that are equal to the basis cost.

I'd imagine that an article like such in journal as such is quite peer reviewed.

Also, there is a private ruling in favor of this though I don't know if I retain the number anywhere. Goes back to the early 1990's at the least.

[boutros]

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