NUA Advice & Suggestion

[jdnd9091]

I'm looking for some input on NUA options. Here is where I stand.

1. I have a cost basis of 253k in Company stock in my 401k. The value of the stock is about 986k.
2. I have checked with my account through Trowe Price and it is eligible for the NUA.
3. I have an income for the next 3 years of about 230k from a deferred comp account, so anything I do in regards to the NUA will bump me into a higher tax bracket.
4. I'm trying to figure out if I can convert half of the NUA amount this year and the other half next year? This would keep my AGI under 400k. This would move me from a 22% bracket to a 24% bracket. Anything higher and it pushes me into a 32% bracket.
5. By moving this into a long term capitol gains the tax bracket moves to 15%, but my understanding is there is another 3.8% charge for ACA?
6. It looks like my overall savings in taxes would be about 3-4%. The plan is to withdraw about 100k a year starting in 5 years from these funds and additional accounts.

I know this is a lot of questions, but hoping to get some feedback that will help.

 

[COcheesehead]

If it were me in your shoes, I would use a tool like TurboTax or Dinkytown 1040 to do a before and after “what if”. Too many moving parts in taxation for my feeble brain and a tool may expose the ramifications better.

 

[cathy63]

I'm pretty sure you only get one shot at a NUA conversion, so you can't split it over tax years.

The 3.8% is Net Investment Income Tax. It applies to a portion of investment income when your MAGI exceeds $200K ($250K if MFJ). It was part of the ACA law, but it applies to everyone, so it's not specifically an ACA tax.

 

[all4j]

I’ll try to walk thru my understanding of how nua works using your numbers. There are a couple of missing pieces to your data though. To answer one big question: I believe you must empty all qualified accounts with that employer in the same tax year and within a calendar year of a triggering event (leave the job, hit age 59.5, death or disability). The rules of your 401k is also possible snag. Likely, you don’t have to treat the entire stock holding the same (that is, might take a portion as nua & move some into an IRA). If you should have other qualified accounts with that employer, they would also have to be emptied (I think. You mentioned a deferred comp….)

Assuming you took it all out, the $253k would be immediately taxable as ordinary income. The other $743 (unrealized appreciation) would not be taxed until shares sold. Many prefer to diversify by selling, but timing is up to you. It would be treated as long term. Any gains (or losses) in 1st year after distribution would be short term. So, if you are ok with that concentration risk, you could hold that (or at least a portion) until deferred comp plan is thru. If held until death, the basis would be adjusted & perhaps no tax.

My understanding is that the original $986k is considered a “distribution” & not investment income. That means the 3.8% would not be levied against that (would love for Cathy63 to keep me honest on all of this).

There is a lot to consider in your overall plan. Are you close to being impacted to RMDs? Would really need to see how the growth of this might impact RMDs, IRMAA, potential roth conversions, et al. Do you have charitable intentions? The stock could be donated also.

Good luck with your decision

 

[njFrank]

This site had an NUA calculator:

FinanceWonk — understand your financial world.

Free calculators and insights for smarter money decisions.

www.financewonk.com

I'm not familiar with the site so take it with a grain a salt, but it seemed accurate when I used it.

 

[Texas Proud]

I'm pretty sure you only get one shot at a NUA conversion, so you can't split it over tax years.

The 3.8% is Net Investment Income Tax. It applies to a portion of investment income when your MAGI exceeds $200K ($250K if MFJ). It was part of the ACA law, but it applies to everyone, so it's not specifically an ACA tax.

This...

You can only do NUA once and only if you have not taken anything from the account... ever...

ETA: Read the long post and will throw in the little I think I know... from what I understand there is no ST gain... if you sell in the first year it is LT cap gain (look it up... I did not sell anything myself)..

You do not have to empty out all your accounts... I left my cash balance account at the company...

I took mine out when I turned 65.. the company gave me the 1099 with the info I was expecting... so the rules about when you leave etc. are not hard....

Make sure you get someone at whatever brokerage you want that has done it... I went to Fidelity and the head VP had no idea how it worked or how to do it... the lady at Schwab said she had done a few and they had a back office that would help... it was done quickly and easily...

 

[all4j]

There are irs rules & there are rules specific to a 401k plan. It sounds as if you have had some conversation with your 401k administrator & some of the finer points may be cleared up by talking to them some more (although they likely won’t give tax advise). One option in many 401ks is the ability to select specific lots. I forgot to mention that in previous post

Rather than get into the importance of that, I’d suggest it beneficial to read an article on kitces.com using nua in search box. It’s a bit dated, but I think it still applies. I only skimmed it, but it covers what’s been cited upthread as well as more plus/minus. (I’m not sure it addresses the topic of using after-tax contributions available in some 401ks, but you likely already have enough to decide)

 

[all4j]

I couldn't figure out how to edit my post #4, but I'm second guessing myself on whether shares from nua distribution are eligible for basis adjustment if held until death of owner...sorry for any confusion, but I doubt that's a deciding factor anyway

 

[Texas Proud]

I couldn't figure out how to edit my post #4, but I'm second guessing myself on whether shares from nua distribution are eligible for basis adjustment if held until death of owner...sorry for any confusion, but I doubt that's a deciding factor anyway

From what I know... yes...

Once converted they are like regular shares...