Net unrealized appreciation (NUA)

[kathyc2]

Client e-mailed about having some interest in doing this.  I've never had one, and don't even remember really hearing about them. 

Client left employer in 2021.  He is well under 59 1/2.  His contributions always went to Roth 401K, so we would only be talking about the employer match that was held in company funds. I'm waiting on numbers from him, but for now let's say 25% of match was held in company stock and 75% was held in regular mutual funds.  Publicly traded company, so stock prices are easy to find. 

What I'm finding from brief research:

1. The entire company match that is held in company funds needs to be removed from retirement classification.

2. The 25% that is in company funds is taxed at regular rates plus 10% penalty.  The amount is calculated as # shares purchased times share price at time of purchase from match.

3.  The 75% non company funds from match  can be rolled to traditional IRA.

4.  His Roth 401K portion can be rolled to his Roth IRA.

5.  The appreciated amount of the 25% company funds is treated as capital gains if sold. This would be the total value at time of disbursement less taxed amounts from #2.

Am I understanding the above correctly?

Questions:

1.  Can the appreciated amount be put into his regular brokerage account, or does it need to be kept separate for some reason?

2.  Can the appreciated amount be put unto a DAF (donor advised fund) thereby bypassing tax on it, and getting a Sch A deduction to boot?

3. What will 1099R look like?  Will it show the total and then the amount that is taxable, or is removing the non-taxable part something that happens on tax return?

 

 

[jklcpa]

My comments are in color.  I haven't had one either, but from what I understand, for what it's worth:

2 hours ago, kathyc2 said:

Client left employer in 2021.  He is well under 59 1/2.  His contributions always went to Roth 401K, so we would only be talking about the employer match that was held in company funds. I'm waiting on numbers from him, but for now let's say 25% of match was held in company stock and 75% was held in regular mutual funds.  Publicly traded company, so stock prices are easy to find. 

What I'm finding from brief research:

1. The entire company match that is held in company funds needs to be removed from retirement classification.  Entire vested balance must be removed IN ONE TAX YEAR, but doesn't all have to be at the same time.  Also, funds from ALL QUALIFIED PLANS of THAT SAME EMPLOYER must be removed.  Company shares cannot be converted to cash prior to distribution. It MUST be in-kind distribution of shares.

2. The 25% that is in company funds is taxed at regular rates plus 10% penalty.  The amount is calculated as # shares purchased times share price at time of purchase from match.  Probably correct. The penalty would be applied to any taxable amounts, but if he separated from service in the year he attained age 55, I *think* he avoids that penalty. Check me on this though.

3.  The 75% non company funds from match can be rolled to traditional IRA.  Correct, and any company stock that is put into the IRA loses the special NUA tax treatment.

4.  His Roth 401K portion can be rolled to his Roth IRA.

5.  The appreciated amount of the 25% company funds is treated as capital gains if sold. This would be the total value at time of disbursement less taxed amounts from #2.  Correct, as long as it is rolled into a taxable account and not into an IRA. Treatment is long-term for the NUA that is built into it at the time of distribution. Any post-distribution gain is also taxed as cap gain, and that portion of gain is either short- or long-term depending on holding period after distribution.  Once stock is in the taxable investment account, dividends are taxable like any other stock investment.

Am I understanding the above correctly?

Questions:

1.  Can the appreciated amount be put into his regular brokerage account, or does it need to be kept separate for some reason?

2.  Can the appreciated amount be put unto a DAF (donor advised fund) thereby bypassing tax on it, and getting a Sch A deduction to boot?

3. What will 1099R look like?  Will it show the total and then the amount that is taxable, or is removing the non-taxable part something that happens on tax return?

I don't have answers to your questions above. The only other things I've seen are:

Taxpayer can elect to distribute all OR part of the employer securities using the NUA strategy. It doesn't have to be all or nothing.

The value of employer stock, excluding the NUA portion, WILL be included in the amount used to calculate the mandatory 20% federal withholding.

 

[kathyc2]

Thanks Judy.

I did answer one of my questions.  There is a box on the 1099R that shows the NUA amount. 

[jiji778]

You're on the right track! The 1099R will show the NUA amount, and you can move the appreciated stock into a regular brokerage account.