Partical Withdrawal and NUA together????

Submitted by Richard Davis on Thu, 2008-09-04 18:49

I have an ESOP. Half of the money is in company stock with very low basis. The other half is in cash and mutual funds managed by my employer. All of this money has been deposited by my employer. The plan allows partial withdrawals and Rollover.

My question is: Can I take a partial distribution of the stock and take NUA AND rollover the other to an IRA? Will this mess the NUA up?



Submitted by Alan Spross on Thu, 2008-09-04 22:49

To utilize NUA, a LSD must be made, not a partial distribution. An LSD means all the assets of similar plans of the employer must be distributed within a single calendar year. The order during that year is not important as long as all the assets are out as of 12/31.

However, you do not have to use all the ESOP shares for NUA. You could use some of them for NUA and transfer the rest along with the other assets to an IRA.

Therefore, the key is what you mean by “partial distribution”.



Submitted by Richard Davis on Fri, 2008-09-05 17:50

What does LSD stand for? You said, “An LSD means all the assets of similar plans of the employer must be distributed within a single calendar year”. Do you mean that I must distribute ALL assets??? Are you saying that I can not distribute my shares and take NUA AND rollover the rest? I have a 401k as well… must that be “distributed” and thus become taxable rathere than rolled over? Thank you in advance for your help.



Submitted by Richard Davis on Fri, 2008-09-05 17:52

partial distribution meaning… I take the stock out (distribution) and roll the other odd assets to an IRA. As I understand NUA, I can only use it on company stock… not the money market and various mutual funds.



Submitted by Alan Spross on Fri, 2008-09-05 20:30

LSD = Lump Sum Distribution. The definition of that was posted earlier.

Distribution from the plan(s) includes both taxable distributions such as the cost basis for employer shares AND transfer of other assets to an IRA. You are correct that NUA can only be applied to employer shares or spin offs from that employer. You can do as you planned as long as the LSD for all assets is complete by the end of the year you distribute the NUA shares. Distribution does not necessarily mean current taxes, and it INCLUDES those assets transferred to an IRA in a non taxable transfer. A 401k plan is generally considered a similar plan to an ESOP and must be part of the LSD, but you should confirm that with the plan administrator.

It is not a good idea to start the process late in the year, such as after 11/1. If any funds are left in the plans after year end, such as a trailing dividend, the LSD requirement will not be met.



Submitted by Richard Davis on Sat, 2008-09-06 02:05

OK… so as I understand it. I do a lump sum distribution that includes a full distribution of the stock shares to me and a rollover of all other assets in the ESOP and the full 401k to the rollover IRA. As long as I have all assets out by 12/31/08, Im OK, right?

The lump sum distribution language throws me off as I think of a taxable distribution when you say lump sum distribution. I don’t think “rollover” when I hear the word, “distribution”.

Am I correct on my first statement? THanks for all of your help!!!



Submitted by Alan Spross on Sat, 2008-09-06 02:33

Yes, you have it now.
You should get a cost basis per share quote from the plan administrator to make sure that the basis is low enough to warrant use of NUA. Tell the administrator what you intend. They must issue a 1099R showing the amount of NUA on the form.



Submitted by Richard Davis on Tue, 2008-09-09 13:51

With further research, the plan offers participants the ability to “diversify” their assets by moving a portion (up to 25%) of their assets in the ESOP to an IRA for diversification purposes after they reach the age of 60. They can still work however. This is not a “triggering event” as it is voluntary, however, it is a partial distribution. Would this negate the use of NUA for this plan?



Submitted by Richard Davis on Tue, 2008-09-09 14:58

This section should have what I am looking for. I don’t see diversifying the account as a “qualifying event” even though there was a partial distribution. As I read it, if there is a qualifying event, which is spelled out in 402(e)(4)(D) I – IV, and the participant rolls any money out of the plan in the form of a partial distribution, then the entire amount is disqualified. However, there is no triggering event here, as I simply wanted to diversify my assets. In Lieu of the Enron debacle, certainly this would be the case and the IRS would not want to punish a pre-retiree for wanting to diversify their investments. Does this sound right or am I missing something???

Thanks in advance for any help.



Submitted by Alan Spross on Wed, 2008-09-10 00:03

Unfortuneately, the tax code gives no consideration in this case for the very valid desire to diversify out of employer stock. The benefits of diversification more than outweigh the contingent tax benefits of NUA. We do not even know how long the LT cap gain rates will stay at this historically low max of 15%.

The partial rollover is considered an intervening distribution and negates the use of NUA in a later year UNTIL there is another triggering event. Reaching age 59.5 is another triggering event which opens up another opportunity for NUA, but if you are over 59.5, then you have no more living triggering events other than disability for the self employed.

I would not fail to diversify even if it means giving up the NUA. But if the NUA is compelling enough, then you can do the LSD and preserve some of the shares for NUA and diversify the rest.



Submitted by Richard Davis on Wed, 2008-09-10 00:28

I understand the logic… but I don’t understand your last comment, “I would not fail to diversify even if it means giving up the NUA. But if the NUA is compelling enough, then you can do the LSD and preserve some of the shares for NUA and diversify the rest.”

How can I do the LSD and “preserve some of the shares for NUA and diversify the rest.” I have already taken a distribution in 2000 to diversify (I may not have been clear there). I was under age 591/2 at the time. Thus, I still have shares with very low basis. Are the remaining shares still eligible?

Thanks!!!



Submitted by Alan Spross on Wed, 2008-09-10 01:02

If you took a distribution before the year you turned 59.5, then turned 59.5, you have a new triggering event that wipes away your prior distribution. Your NUA options are still good.

But at this point if you want to diversify again, you will lose the NUA for the future UNLESS you do your LSD in the same year. If you diversify and do the LSD in the same year, eg this year, then you can safely do both. What you cannot do after 59.5 is to do another distribution for any reason, and still want to preserve NUA for a later year. If you diversify again this year, you must also do the LSD this year to preserve NUA.

But again, your prior distribution in 2000 is no problem since you acquired another triggering event when you turned 59.5.



Add new comment

Log in or register to post comments