401k NUA Tax Strategy

[Hdhead]

Question - I have a sizable portion of company stock with a large NUA value. I inquired with the 401k administrator and they advised me I could not use this strategy because I took out withdrawals in the past(years ago). I can't find anywhere in IRS publications that addresses past withdrawals and ineligibility. Anyone that has insight would be appreciated.

 

[Big_Hitter]

have you read the 401k code/regs?

 

[gerntz]

Question - I have a sizable portion of company stock with a large NUA value. I inquired with the 401k administrator and they advised me I could not use this strategy because I took out withdrawals in the past(years ago). I can't find anywhere in IRS publications that addresses past withdrawals and ineligibility. Anyone that has insight would be appreciated.

Well, saving NUA comes only with LSD. The administrator is right unless you have a new triggering event for LSD: separating after age 55, turning 59.5, or becoming disabled or dying.

Note that there is a current tax-free approach saving NUA also. See this article & section on Partial Rollovers.

Planning With Employer Stock In A Qualified Plan

Note that the article is from 1999 & tax rates may be/are different.

 

[kaneohe]

You might consider posting your question at fairmark.com in the retirement
forum and watch for a response by Alan S.

 

[Texas Proud]

I do not know the law that well, but from what I read I do not see any mention of having prior distributions considered....

Now, maybe you lose the lump sum definition because of that... but when did you get a distribution? Was it taxable?


I read (and of course I could be wrong) that as long as you do a lump sum of everything, including your stock, within one year you can exclude the gain....


(D) Lump-sum distribution For purposes of this paragraph— (i) In general The term “lump-sum distribution” means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient— (I) on account of the employee’s death,
(II) after the employee attains age 59½,
(III) on account of the employee’s separation from service, or
(IV) after the employee has become disabled (within the meaning of section 72(m)(7))

 

[Texas Proud]

Interesting discussion on another site...

NUA and lump sum distributions - 401(k) Plans - BenefitsLink Message Boards

 

[Winemaker]

My 401k plan required me to remove all assets from the plan in order to use NUA. Since the remaining assets, after the company stock went to a taxable account, had to go to an tIRA. Since I was retiring at 55, I could not withdraw from my tIRA without the 10% penalty. So I simply sold out, and reaping gains under Plan II. %$#@'em if they can't take a joke! I'm paying more in taxes but it's a 1st world problem.

 

[Hdhead]

I do not know the law that well, but from what I read I do not see any mention of having prior distributions considered....

Now, maybe you lose the lump sum definition because of that... but when did you get a distribution? Was it taxable?


I read (and of course I could be wrong) that as long as you do a lump sum of everything, including your stock, within one year you can exclude the gain....


(D) Lump-sum distribution For purposes of this paragraph— (i) In general The term “lump-sum distribution” means the distribution or payment within one taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient— (I) on account of the employee’s death,
(II) after the employee attains age 59½,
(III) on account of the employee’s separation from service, or
(IV) after the employee has become disabled (within the meaning of section 72(m)(7))

I took periodic withdrawals for a few years and have not taken anything for the past 3 years. Paid regular income tax on all the withdrawals. I've read all IRS publications but do not definitively find anything that says you can not do a NUA if you have taken distributions in the past. Doesn't even make sense that it would be a stipulation as long as you meet all the requirements in the year you do the NUA, but then again a lot of tax law is nonsensical.

 

[scrabbler1]

My 401k plan required me to remove all assets from the plan in order to use NUA. Since the remaining assets, after the company stock went to a taxable account, had to go to an tIRA. Since I was retiring at 55, I could not withdraw from my tIRA without the 10% penalty. So I simply sold out, and reaping gains under Plan II. %$#@'em if they can't take a joke! I'm paying more in taxes but it's a 1st world problem.

My plan also required me to empty my entire 401(k) account if I chose to use NUA for the company stock.

I had in my 401(k) company stock, pretax contributions, after-tax contributions, and earnings on both the pretax and after-tax contributions. What I did was to do a direct rollover of the pretax contributions and all the earnings into a tIRA, cash out the company stock using NUA, and withdraw as cash all the after-tax contributions.

The direct rollover into the tIRA generated no current tax liability. Taking out the after-tax contributions all at once and separately from its earnings, also generated no tax liability, something I was allowed to do as part of the liquidation. Because 97% of the stock's value was NUA, most of the stock's value was taxed at only 15%. The stock's par value was taxed as ordinary income. And, most importantly (and something I didn't know until I began doing my tax return), the NUA is NOT subject to the 10% penalty for early withdrawal (I was not 59 1/2 years old). Only the par value (the 3% of the stock's value) was subject to that penalty.

 

[gerntz]

I took periodic withdrawals for a few years and have not taken anything for the past 3 years. Paid regular income tax on all the withdrawals. I've read all IRS publications but do not definitively find anything that says you can not do a NUA if you have taken distributions in the past. Doesn't even make sense that it would be a stipulation as long as you meet all the requirements in the year you do the NUA, but then again a lot of tax law is nonsensical.

I haven't seen where you state that you're separating from the company. If you are, you can take LSD & use NUA. How would the administrator/company stop you from taking a LSD?

 

[Hdhead]

You might consider posting your question at fairmark.com in the retirement
forum and watch for a response by Alan S.

Thank you for the tip. I did exactly that and got a very thorough response from Alan S. He is obviously a very, very wise and knowledgeable man. Unfortunately I am not eligible because I took a distribution after the qualifying event of 59 1/2. Kinda crazy rules, oh well it was a good thought anyway.

 

[gerntz]

Thank you for the tip. I did exactly that and got a very thorough response from Alan S. He is obviously a very, very wise and knowledgeable man. Unfortunately I am not eligible because I took a distribution after the qualifying event of 59 1/2. Kinda crazy rules, oh well it was a good thought anyway.

But if you're still working for this company, you get another bite at the apple when you retire/separate.

 

[Winemaker]

My plan also required me to empty my entire 401(k) account if I chose to use NUA for the company stock.



The direct rollover into the tIRA generated no current tax liability.

I agree with you. I guess I left out that my "distributions" from my tIRA would have been subject to the 10% penalty, not the actual rollover.

 

[Hdhead]

But if you're still working for this company, you get another bite at the apple when you retire/separate.

Nope, separated from the company many years ago.

 

[Texas Proud]

Nope, separated from the company many years ago.

I will just throw this out as an option....

Is there any way you can get a 'job' with them for a week.... or even a day

If so, then you can separate from them again and it starts over... allowing you to use NUA....

If I knew anybody there I would try this... it is no skin off of their back since this is a federal issue... heck, I would PAY them $500 to $1000 for any paperwork they need to do so you would qualify....