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Recently the IRS issued a Notice, 2014-54, which details some information regarding the allocation of pre-tax funds from a qualified plan (such as a 401(k) plan) into a Roth IRA. This is a clarification of a question that has been on the minds of folks in the financial services industry for some time, and it’s a good result. Now the question becomes: does this help to clarify NUA basis allocation strategies?
If you’d like additional detail on Notice 2014-54, you can find the actual text of the Notice by clicking this link.
What I find interesting about this Notice is that this is the first time that the IRS has used this interpretation of the rules referenced specifically in IRC Section 402(c)(2), which is the code section I’ve referenced before regarding allocation of basis for Net Unrealized Appreciation (NUA) treatment for employer stock. (See more information in this most recent article NUA Allocation Twist – Not as Easy as it Looks.) The problem (outlined in the article) has been that plan administrators are unwilling to attempt applying the allocation of basis in an NUA transaction because there has never been any guidance from the IRS on such an allocation of basis. Notice 2014-54 may be the first step toward such guidance.
I’ve sent queries to the best minds I know in the retirement plan law universe to get additional insights into this concept – and as yet have not received a confirmation either way. I think this is a step in the right direction, but don’t get too excited yet.
I’ll keep you posted.
Sterling Raskie, MSFS, CFP®, ChFC®
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Any change in the basis allocation issue?
No, not at all. I have many people contact me about it, but no one has been able to apply it, to my knowledge.
My husband will wait until 2018 at his age 70 to start his SS benefit. I will be 66 at 2019. Can I file for spouse benefit when I turn 66 and wait until I turn 70 for my own benefit?
Under the present interpretation of the rules, yes that should be an available strategy.
jb
My husband is getting ready to retire and will be considering using the NUA rule and would like to know if you have gotten any clarification to the basis allocation issue. Also, can you explain in greater detail how it works with a pre-tax basis? Can we roll the basis over and take out as needed to avoid paying tax on 100% of the basis when we take it from the company? Thank you!
Gayle – I have not had any clarification on the basis allocation issue. If the plan administrator does not agree with the assessment of the rules from the IRS, it’s not going to work. The plan administrator has to code the 1099R’s correctly for it to work, and I have yet to hear of an administrator who is willing to do so.
jb
Hi Mr. Blankenship – I am wondering if you know anymore regarding NUA of pretax stock in a 401K and the need for plan administrators to code 1099R’s correctly….since it is May 2016 would like to know if anything has become clarified. If Fidelity houses my 401K is it Fidelity’s plan admin. that needs to agree to the NUA basis allocation Notice?
Thanks much,
LK
I’ve seen no updates on this. Fidelity (in your case) will be the administrator who would need to code the 1099R properly.
Any more guidance available for redeeming NUA-only (allocating basis to rolled over shares) from a Qual plan? I have a case with Conoco with $900k in stock with a $450k basis.
Andrew, unfortunately no there has been no elaboration from the original Notice. I requested input on this from the IRS but got a standard-issue non-answer.