NUA Help

[nutmegger]

Has anyone successfully used the approach to a NUA transaction suggested below? ?

It has been suggested to me that I can avoid the immediate ordinary income tax burden on a NUA (net unrealized appreciation) transaction for company stock held in my 401k by depositing an equivalent amount in a rollover IRA. By way of example:

If I NUA 1000 shares of company stock with a founders basis of $5 and a FMV of $50, I would have an immediate ordinary income tax liability of 1000 X $5 or $5000. I would then owe LTGC tax on the difference between FMV and founders basis when I sell.

The variation I was encouraged to use goes as follows. Instead of paying ordinary income tax on the $5000 at the time of the NUA transaction, transfer 100 shares (with $50 FMV each) to a rollover IRA. Take the 1000 shares out free and clear. Otherwise this follows a classic NUA transaction.

 

[John Galt]

Never heard of doing that and it seems illogical to me.
That certainly doesn't mean it won't work though,
although I would be a bit surprised. The days when I was on top of these issues are long behind me.

John Galt

 

[wzd]

It doesn't sound quite right to me. If you do a direct transfer of shares from the 401 to the rollover IRA, it is not a taxable transaction and does not affect the NUA transaction (except where it may violate lump sum rules for 401k's and make the NUA ineligible..not sure on that). If you take the stock out, I don't think you can contribute stock to an IRA, even as a 60 day rollover. I think it has to be cash.

There are a number of web sites around with expert opinions on this, including:
http://www.bottomlinesecrets.com/blpnet/article.html?article_id=16529
http://www.fed.org/onlinemag/july01/tips.htm
http://www.fpanet.org/journal/articles/2004_Issues/jfp0204-art7.cfm

It is not a simple area, and there seems to be some limitations on NUA from 401(k) plans, as opposed to 401a (after tax monies). In particular it looks like a full withdrawal is required for NUA treatment in the case of a 401k, but go ahead and research this carefully yourself. This is quite beyond anything I would consider taking advice from a BB for!

Wayne