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NUA Allocation Twist – Not as Easy as it Looks

NUA ALONE

NUA ALONE (Photo credit: NAPARAZZI)

I’ve written much about the Net Unrealized Appreciation (NUA) treatment for company stock in a 401(k) plan – this is the provision that allows you to pull out company stock as part of a full distribution from the plan and get favorable tax treatment for the gain on the stock.  More about NUA can be found in this article about Net Unrealized Appreciation Treatment.

One of the factors in that article speaks to a special way to allocate the basis (original cost) of the stock.  Specifically, if handled correctly, the ordinary income tax on the NUA move can be minimized or eliminated, and the capital gains treatment maximized.

However. (As you know, there’s always a however in life!)

The problem with this move is that you absolutely must get the 401(k) administrator to go along with your plan – in order to make sure that the 1099R generated by your distribution correctly describes how you’ve allocated the basis.  If not, the strategy depends entirely on your own word and record-keeping, which I personally would not want to have as my only basis if the IRS disagrees with you on the applicability of the law to your actions.

I’ve spoken to quite a few folks who have looked into this, hoping to take advantage of the way I’ve described it and minimize or avoid tax altogether.  It seems that, at least among all those I’ve heard about, 401(k) administrators as a group don’t like to take direction from their participants.

Either that or they don’t want to do anything out of the ordinary (this is the more likely reason, in my opinion).  I can’t say that I blame them – there’s no benefit in it to them.  Even when confronted with the rules and the law that allow this move, I’ve not heard from any that have gone along with it yet.  (If you have gone down this path successfully, please let me know – leave a comment below! I’d love to hear of successes with this component of the law.)

So, unfortunately if you’re hoping to use the special allocation of basis option, I’m in your court, but expect to run into some push-back.  Although the option seems to be completely valid, don’t count on getting to use it.

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4 Comments

  1. GaryNo Gravatar says:

    Any chance of getting an IRS Letter ruling on this method of allocating the basis?

    1. jblankenshipNo Gravatar says:

      Upon further investigation, I’ve found that there was a PLR (PLR 8538062) that supports this option. It’s not clear if there has ever been a testing of this PLR – but it is likely that the IRS would claim that shares carry their own basis individually rather than as a lot (as was allowed in the referenced PLR). I doubt if it’s worth the cost and effort to pursue the PLR at this stage, in my opinion.

  2. DIY InvestorNo Gravatar says:

    I believe I blame them. After all administrators are fiduciaries and are required to act in the best interests of the plan. I have pointed out to several clients to be aware of the NUA to strategize on taxes when they rollover assets. As yet I’ve had no feedback but appreciate your post. Another thing to look out for.

    1. jblankenshipNo Gravatar says:

      I know where you’re coming from, Robert. Taken as a group though, I don’t think plan administrators are much for sticking their necks out.

      jb

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