Questions on 401k rollover, NUA, After tax offset etc.

[Slow But Steady]

Dear Friends,

I need to tap the collective wisdom of the board.

I thought I had my 401k rollover problem all figured out, but then the Vanguard guy told me something about using after tax (not Roth) company shares in the 401k to offset some of the ordinary income from rolling over the appreciated company stock. He told me at least two different stories about how it works, and I haven't been able to google up a clear explanation either.

I'm trying to decide whether to roll the after tax company shares into a Roth IRA or transfer them into a taxable account to offset part of the ordinary income from the NUA shares.

Adjusted to round numbers, I have

$200K current value of before-tax shares with a basis of $100K

and

$110K current value of after-tax shares with a basis of $40K.

If I roll them all into a taxable account, what will be the net taxable income that I will see on the 1099?

Thanks for your help!

 

[travelover]

When I did it, the after tax dollars went directly to a Roth, the pre-tax dollars and the earnings on both pre-tax and after-tax went into a traditional rollover IRA.

So, in your example you'd pay tax on everything but $40K.

 

[Sunset]

When I did it, the after tax dollars went directly to a Roth, the pre-tax dollars and the earnings on both pre-tax and after-tax went into a traditional rollover IRA.

So, in your example you'd pay tax on everything but $40K.

But here you are ignoring the NUA special treatment available.

 

[Slow But Steady]

But here you are ignoring the NUA special treatment available.

Yes... that's what I'm trying to get a handle on. Can I somehow use the $40K to offset some of the ordinary income tax on the $100K?

 

[Sunset]

For folks who don't know about NUA , here is a site with an example. Note the example only talks about the advantage of the pre-tax 401K effect
Employer stock, your 401(k) and the NUA - MarketWatch

so for OP on the $200K of pre-tax shares, he would be paying tax on the basis of $100K and later when sell the $200K pay like normal capital gain on it (which if done the next day would be $200K - basis of $100K = capital gain of $100K) The tax on capital gain of 100K is less than $100K income, which is where the benefit comes from.

No idea on the post tax , but applying the same logic, it would seem that the basis is already been taxed, so in my (non-tax expert) view, doing NUA on the post-tax amount would be tax free, until the shares are sold at which point you would use the 40K basis to calculate the gain.

I can see how getting advice on this post-tax amount treatment is hard.

 

[travelover]

But here you are ignoring the NUA special treatment available.

Never mind - my bad. I overlooked that this was employer stock.

 

[scrabbler1]

When I left my company 8 years ago, I had to immediately liquidate the entire 401k/ESOP account if I wanted to take advantage of NUA for the company stock part, per plan rules. IOW, I could not keep my 401k money in the plan but at the same time cash out the ESOP using NUA.


So, I did a direct rollover of all the pretax contributions, company match dollars, and earnings on all of it into an IRA. That was a pretty typical trustee-to-trustee rollover done within 60 days to avoid any withholding issues. That went smoothly.


I also had a small amount of after-tax contributions in the 401k. I knew I would need that cash to pay some of the extra income taxes on the ESOP cash-out, so I took the principal of those after-tax contributions as cash. It was a non-taxable event. The earnings on those after-tax contributions went with all the pretax money into my IRA.


I cashed out the company stock in the ESOP. All of it was pretax, none of it was after-tax shares. Nearly all of the ESOP's shares was NUA, about 97% of it. This meant that all of that NUA was taxable only at LTCG rates which back in 2008 was 15%. Only the par value (basis) was taxable as ordinary income, subject to the 10% penalty because I was under age 59 1/2. The NUA was not subject to the 10% penalty, something I did not learn until I was preparing my 2008 income taxes (that was a very pleasant surprise).


I received 2 1099-R forms, one for the ESOP and the other for everything else. I had to combine them when posting some of the numbers on my federal income tax forms.


I did have a considerable tax bill but the NUA greatly helped keep it down. The huge NUA did trigger the AMT on the rest of my income. And I had to pay state income taxes although there was no penalty there for the early withdrawal.


I then invested the ESOP's proceeds into a bond fund and have been living off its monthly dividends for the last 8 years. The IRA's value has most than doubled since late 2008 and I have had only a ~50/50 AA.


OP, if those after-tax ESOP shares are akin to my after-tax 401k contributions, you may be able to use that part of your cash-out to pay some of the taxes on the rest of your taxable non-IRA distribution the way I did in 2008.


I agree with Sunset's statements.

 

[Slow But Steady]

Can the after-tax appreciated company shares be rolled into a Roth IRA in-kind, or is it just the basis value that can be rolled into a Roth?

Answers are kind of hard to come by. I may have to pay for an hour of the tax guy's time.

 

[Winemaker]

When I left my company 8 years ago, I had to immediately liquidate the entire 401k/ESOP account if I wanted to take advantage of NUA for the company stock part, per plan rules. IOW, I could not keep my 401k money in the plan ....

This, but your plan rules may be different. I had over $500,000 in capital gains that I gave up, but because I didn't/couldn't rollover to a tIRA and take distributions before 59.5 without using the 72t rule.

 

[Slow But Steady]

Thanks to everyone who responded. Are there any more fresh insights on this question?

I'm stuck.

 

[travelover]

Thanks to everyone who responded. Are there any more fresh insights on this question?

I'm stuck.

I'd go to the Fairmark Forum and ask for Alan S. He is sharp as a tack. He also posts on the Bogleheads forum.

 

[Texas Proud]

Just a guess from the knowledge that I think I have... but the answer to your question...

If you roll the before tax into a taxable account you will have $100K of ordinary income... the other $100K is not taxed unless you sell and then at LT cap gain rates...


If you roll the after tax into a taxable account... well, I really do not know...

It might mean nothing... you just move it to an account where you have cap gain waiting to be had and any divis will be taxable...


However, if you roll it into a ROTH (which, BTW, I just learned you can do a couple of weeks ago on this forum), then NONE of it is ever taxable.... yes, you get your gain for free... and any future earnings are tax free, including any divis if you take them out.... (I do not remember if you have to wait 5 years or not, so check it out)....

To me, this is a no brainer... roll into a ROTH...

 

[Slow But Steady]

I'd go to the Fairmark Forum and ask for Alan S. He is sharp as a tack. He also posts on the Bogleheads forum.

Thanks for the suggestion. Alan gave me a detailed breakdown of what the 1099R would look like, which is exactly what I needed. It looks like the Fairmark forum is a great place to get all kind of tax ideas and advice.

 

[Sunset]

Thanks for the suggestion. Alan gave me a detailed breakdown of what the 1099R would look like, which is exactly what I needed. It looks like the Fairmark forum is a great place to get all kind of tax ideas and advice.

Can you share so the rest of us learn/benefit from his input. ?

 

[gerntz]

Dear Friends,

I need to tap the collective wisdom of the board.

I thought I had my 401k rollover problem all figured out, but then the Vanguard guy told me something about using after tax (not Roth) company shares in the 401k to offset some of the ordinary income from rolling over the appreciated company stock. He told me at least two different stories about how it works, and I haven't been able to google up a clear explanation either.

I'm trying to decide whether to roll the after tax company shares into a Roth IRA or transfer them into a taxable account to offset part of the ordinary income from the NUA shares.

Adjusted to round numbers, I have

$200K current value of before-tax shares with a basis of $100K

and

$110K current value of after-tax shares with a basis of $40K.

If I roll them all into a taxable account, what will be the net taxable income that I will see on the 1099?

Thanks for your help!

You need to read this article:

Planning With Employer Stock In A Qualified Plan

specifically, the part titled Partial Rollover.

First, you must do a Lump Sum Distribution for NUA to matter to you at all. For the non-employer stock portion, to avoid immediate taxes, roll it directly to an IRA from the 401k.

If you remove from a 401k employer stock as stock (This is the key part. Do not roll the stock to an IRA directly - unlike non-employer stock 401k assets - from 401k if you wish to do what follows. If you roll the employer stock directly to an IRA, you lose the NUA effect.) to say a brokerage account, no tax is due on NUA until you sell that stock. For the $110K with after tax basis as $40K, you can sell the $40K of stock with no taxes due - it's yours free & clear - and the remaining $70K has zero basis cost; i.e., you can assign the total basis cost to that $40K of employer stock you sell. Of course you'll have LTCG tax on the $70K whenever you sell it.

For the $200K with $100K basis pre-tax, if you remove it all from the 401k as employer stock (This is the key part. Do not roll the stock to an IRA directly from 401k if you wish to do what follows.), no tax is due on NUA until you sell that stock. You pay tax on the basis value stock IF you don't roll the basis cost stock to an IRA within 60 days of IRA withdrawal. However, if you roll the basis stock to an IRA subsequent to the 401k withdrawal within 60 days, then there are no taxes due on either the IRA deposited basis cost stock nor on the NUA zero basis stock.

How do I know this? I did it in 2005 for a lot more than your amount. And I know 10's of people who have done it without IRA challenge. I know well the CPA (retired) who popularized this technique.

The beauty of this method is there is no immediate tax due on any employer stock. The negative to it is that if you employ a financial advisor who charges % of assets, he/she can't claim to manage the zero basis employer stock & thus charge one for its value. A shame, isn't it?

 

[Slow But Steady]

Can you share so the rest of us learn/benefit from his input. ?

Sure. Here's a link.

Fairmark Forum :: Retirement Savings and Benefits :: Questions about NUA, after-tax company shares, and etc.

 

[Slow But Steady]

You need to read this article:

Planning With Employer Stock In A Qualified Plan

specifically, the part titled Partial Rollover.

Thanks... I understand most of that.

There have been some changes since the article you mentioned, specifically IRS Notice 2014-54. That's what I'm really trying to get a handle on. It looks like the ruling should be quiet beneficial however I decide to play it.

https://www.kitces.com/blog/irs-not...r-tax-401k-contributions-for-roth-conversion/

 

[gerntz]

Sure. Here's a link.

Fairmark Forum :: Retirement Savings and Benefits :: Questions about NUA, after-tax company shares, and etc.

To me, that article is more worried about diversification than immediate taxes. One needs to decide what's more important at that point in time. In particular, if you think LTCG tax rates will change in your favor or you can manage to keep LTCG's low when selling zero basis NUA stock, odds for avoiding immediate taxes swing in your favor.

 

[gerntz]

Thanks... I understand most of that.

There have been some changes since the article you mentioned, specifically IRS Notice 2014-54. That's what I'm really trying to get a handle on. It looks like the ruling should be quiet beneficial however I decide to play it.

https://www.kitces.com/blog/irs-not...r-tax-401k-contributions-for-roth-conversion/

Thanks. That affects the basis cost part, not the NUA part. For the after tax basis cost stock, I read you can deposit that in a Roth vs. selling tax-free outside the Roth. That looks like the more favorable option - assuming you first remove the employer stock from the IRA as stock & then transfer the basis portion to the Roth.

 

[Slow But Steady]

I think it's going to be best to put all the after-tax stock directly in the Roth. Though it will increase the tax due for 2017, it will make a bunch of money fully tax free in the long run.

But I'm still in the process of modeling the various possibilities.

 

[Texas Proud]

You need to read this article:

Planning With Employer Stock In A Qualified Plan

specifically, the part titled Partial Rollover.

First, you must do a Lump Sum Distribution for NUA to matter to you at all. For the non-employer stock portion, to avoid immediate taxes, roll it directly to an IRA from the 401k.

If you remove from a 401k employer stock as stock (This is the key part. Do not roll the stock to an IRA directly - unlike non-employer stock 401k assets - from 401k if you wish to do what follows. If you roll the employer stock directly to an IRA, you lose the NUA effect.) to say a brokerage account, no tax is due on NUA until you sell that stock. For the $110K with after tax basis as $40K, you can sell the $40K of stock with no taxes due - it's yours free & clear - and the remaining $70K has zero basis cost; i.e., you can assign the total basis cost to that $40K of employer stock you sell. Of course you'll have LTCG tax on the $70K whenever you sell it.

For the $200K with $100K basis pre-tax, if you remove it all from the 401k as employer stock (This is the key part. Do not roll the stock to an IRA directly from 401k if you wish to do what follows.), no tax is due on NUA until you sell that stock. You pay tax on the basis value stock IF you don't roll the basis cost stock to an IRA within 60 days of IRA withdrawal. However, if you roll the basis stock to an IRA subsequent to the 401k withdrawal within 60 days, then there are no taxes due on either the IRA deposited basis cost stock nor on the NUA zero basis stock.

How do I know this? I did it in 2005 for a lot more than your amount. And I know 10's of people who have done it without IRA challenge. I know well the CPA (retired) who popularized this technique.

The beauty of this method is there is no immediate tax due on any employer stock. The negative to it is that if you employ a financial advisor who charges % of assets, he/she can't claim to manage the zero basis employer stock & thus charge one for its value. A shame, isn't it?

Now this sound interesting.... so a few questions...

The article linked does not go into detail as your post does... and does not actually say what you say... so I want to flesh this out a bit.... I do not want to go into the after tax issue since I have none... just a 401(k) with company stock....


So, I know that I have to do a complete distribution to get the tax treatment... not a problem.... here is where I want to follow better...

You transferred 100% of your company stock into an taxable account.... within 60 days you then transferred stock that was valued at your basis into a tIRA... Is this correct?

Or, did you transfer the stock that had basis directly into the tIRA and the NUA stock into a taxable account? (I do not think this is what your wrote, so this is why I am asking)...



If you did the first, I assume you got a 1099 with the basis amount to report to the IRS... did you then check that you rolled it into an IRA and that was all that was needed?

 

[gerntz]

now this sound interesting.... So a few questions...

The article linked does not go into detail as your post does... And does not actually say what you say... So i want to flesh this out a bit.... I do not want to go into the after tax issue since i have none... Just a 401(k) with company stock....


So, i know that i have to do a complete distribution to get the tax treatment... Not a problem.... Here is where i want to follow better...

You transferred 100% of your company stock into an taxable account.... Within 60 days you then transferred stock that was valued at your basis into a tira... Is this correct? yes. And actually a bit more due to stock value flucuation.

or, did you transfer the stock that had basis directly into the tira and the nua stock into a taxable account? (i do not think this is what your wrote, so this is why i am asking)... no. Any employer stock
from 401k directly to ira loses it's nua.



if you did the first, i assume you got a 1099 with the basis amount to report to the irs... Did you then check that you rolled it into an ira and that was all that was needed?

Need to check on this. It's been a while.

 

[gerntz]

Need to check on this. It's been a while.

To your question: "if you did the first, i assume you got a 1099 with the basis amount to report to the irs... Did you then check that you rolled it into an ira and that was all that was needed?"

It's been 12 years & I had to hunt thru files to see what I actually received from the plan.

I received a 1099-R that listed gross distribution (All of the stock, line 1) & separately the taxable distribution (The basis value, line 2a). Box 2b had an X in Total distribution box. Line 6 listed the NUA amount, so line 6 + line 2 equaled line 1. Of course separately I had rolled all non-employer stock into an IRA directly to empty the 401k as required for Lump Sum Dist.

Because I subsequently rolled the entire basis value stock, plus a bit, into an IRA, on line 16a of the Form 1040 I listed the entire distribution value of stock on the 1099-R (PLUS the value from the other 1099-R for the non-employer stock I rolled into an IRA.) and on line 16b listed 0 as taxable amount. In the left margin of line 16 I wrote "Rollover".

The IRS could then compared the 1099-R basis cost amount with the IRA deposit amount and see the deposit was larger than the basis. Never heard a word.

 

[scrabbler1]

Gerntz, I decided to dig out my old files to see how my 1099-R forms (I received 2) described the various amounts I received from my liquidated 401k/ESOP back in 2008. Some of what I received and showed is like what you received and showed although there were some differences.


The first 1099-R, for the 401k's pretax contributions and earnings showed in Box 1 its total amount I received via check made out to my IRA's trustee. The distribution code was G. The taxable amount was $0, as this was a direct rollover.


The second 1099-R included numbers for the company stock and after-tax contributions. Box 1 showed the total for both types. Box 2a showed the small, taxable amount, the basis or par value of the company stock. Box 5 showed my after-tax contributions. Box 6 showed the NUA on the company stock. The distribution code was 1 (early distribution, no exception).


In a separate statement I included with my federal income tax forms, I described each of the 4 amounts and added them together to include on line 16a. The small, taxable portion on line 16b was the amount shown in box 2a of the second 1099-R form. The NUA appeared on Schedule D as a cap gain and became part of line 13 (cap gains from Schedule D).

 

[Texas Proud]

To your question: "if you did the first, i assume you got a 1099 with the basis amount to report to the irs... Did you then check that you rolled it into an ira and that was all that was needed?"

It's been 12 years & I had to hunt thru files to see what I actually received from the plan.

I received a 1099-R that listed gross distribution (All of the stock, line 1) & separately the taxable distribution (The basis value, line 2a). Box 2b had an X in Total distribution box. Line 6 listed the NUA amount, so line 6 + line 2 equaled line 1. Of course separately I had rolled all non-employer stock into an IRA directly to empty the 401k as required for Lump Sum Dist.

Because I subsequently rolled the entire basis value stock, plus a bit, into an IRA, on line 16a of the Form 1040 I listed the entire distribution value of stock on the 1099-R (PLUS the value from the other 1099-R for the non-employer stock I rolled into an IRA.) and on line 16b listed 0 as taxable amount. In the left margin of line 16 I wrote "Rollover".

The IRS could then compared the 1099-R basis cost amount with the IRA deposit amount and see the deposit was larger than the basis. Never heard a word.

Wow... thanks a bunch!!!

I have been holding off doing this because I have about $80K in taxable amount and did not want to get that tax hit yet... but if I can roll it over I just might....

Now I have to wait for the repeal and replace when my Obamacare credit is not in jeopardy...