401k, 403b, Employer Retirement Plan

NUA and 401k Rollover

May part of the lump sum distribution be a 401k rollover?

Any amount eligible for 401k rollover from a qualified retirement plan may be rolled to an Individual Retirement Account or IRA account.

However, the special treatment of the NUA (Net Unrealized Appreciation) on employer stocks applies only to the employer stocks that are not rolled over. This means that any amount rolled over to an IRA loses its ability to qualify for NUA treatment.

The only time that a participant would be prevented from 401k rollover a portion of the 401k or other employer retirement plan distribution is if the individual wanted to qualify for the special tax treatment given through 10-year forward averaging.

Note: 10-year averaging applies only with respect to individuals born before 1936 and meets other conditions.

What factors enter into the decision whether to retain or 401k rollover employer stock that qualify for NUA treatment?

Some of the factors include:

Income tax cost basis on stock vs. tax deferral in an IRA.
Capital gains tax rate at time of sale vs. income tax rate at time or IRA withdrawal. Click here to read about Capital Gains Tax.
Future prospects for the company stock versus other investment alternatives.
Need for diversification (sales are nontaxable if within an IRA).
Protection from creditors (IRA may have creditor protection under state law, taxable account does not).
Attractiveness of Roth IRA conversion (from IRA only).
Special tax situations (use of capital loss carry forwards on NUA stock, basis step up).
Desire to defer future earnings (dividend distributions).
Time value of money/timing of tax payment on NUA or IRA amounts.

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401k, 403b and Employer Retirement Plan website is a resource website. Please consult your financial advisor about your specific 401k, 403b, IRA, and employer retirement plans situations.

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