NUA in New York state and $20,000 exclusion
I am 61 years old. I have retired from my company. I have 401k with my prior employer. I live in NY state. NY state allows $20,000 yearly exclusion for taxation purpose when one withdraws from 401k plan, IRA plan etc. I am planning to convert my work 401k into a separate IRA account. Would I be able to receive a $20,000 in NY state tax exclusion for the NUA portion of employer stock upon distribution from this 401k qualified plan? In other words, if my basis for NUA purpose is $21,000 — would I be able to get a $20,000 exclusion (assuming of course that I will convert the rest of my 401k into IRA). Thank you very much.
Permalink Submitted by Alan - IRA critic on Fri, 2019-01-18 18:54
Per NYS Pub 36, the 20,000 exclusion only applies to periodic distributions except for IRA and Keogh distributions. Since the distribution of NUA shares is a non periodic lump sum distribution, the taxable cost basis shown on the 1099R would not qualify for the exclusion. However, once you take any IRA distributions after the rollover, the exclusion will apply to the IRA distributions.
Permalink Submitted by abraham boznick on Fri, 2019-01-18 23:04
thank you — excellent response. A little bit different scenario. What if I do not do any rollover to an IRA, and keep my previous employer 401(k) — and then do “once an while” withdrawls from this 401 (k). Would these 401(k) withdrawls qualify for $20,000 exclusion. Please not that I understand that in doing so I will forfeit my abilty to use NUA at a later time.
Permalink Submitted by Alan - IRA critic on Sat, 2019-01-19 03:18
Good question, and there is no coding on the 1099R identifying a periodic payment. If the distributions are random or flexible, they would not be treated as periodic. A 72t plan should be considered as periodic, but the plan administrator may have a specific form or requirement beside the W 4P in order to treat the distributions as periodic and must know up front because the withholding rules for a periodic payment differ from those of a non periodic payment or an eligible rollover distribution (see Form W 4P). Most likely, if these distributions are eligible rollover distributions (subject to mandatory 20% withholding as a minimum) they won’t be considered periodic. But there is enough gray area here that you might want to contact a NY CPA to find out what criteria the NY Dept of Taxation is using to determine if the distributions are periodic.
Permalink Submitted by abraham boznick on Sat, 2019-01-19 05:58
Thank you again. I did a “dry run” in Turbotax 2018 as if I transferred NUA stock from my my 401(k). I enered the anticipated codes into 1099-R. Say in box 1 $450,000, in box 2A $38,000, in Box 6 $412,000 and code 7 in Box 7. Interestingly Turbotax ALLOWED me to take the $20,000 exclusion on this NUA distribution (even though the software should realize that you can only do complete lump sum withdrawl if you are doing NUA and this is not a periodic payment). I suspect that Turbotax is not sofisticated enough to detect this as a lump sum transfer. However, my understanding that NYS approves those Turbotax forms before Turbotax sends them out for general distribution. Would be interesting how other commercial tax software treats this situation. O well.
Permalink Submitted by Alan - IRA critic on Sat, 2019-01-19 16:50
Did you tell Turbo tax that Box 2b of the 1099R indicates “total distribution”? If not, do that and see if it still provides the 20k exclusion. If it does, it is either a bug or Ttax knows something beyond what Pub 36 says. Hard to imagine that NYS would not update Pub 36 if periodic distributions from 401k or 403b accounts were not required or would miss a chance at tax revenue. If you cannot get clarity, then call a NYS CPA. I am sure that many people are keeping their 401k accounts and taking discretionery distributions and RMDs from them. However, in your case that total distribution box is more of a red flag than for people just taking out discretionery amounts.
Permalink Submitted by abraham boznick on Sat, 2019-01-19 21:46
yes the box for 2b was checked as total distribution. I agree that it is either a bug or some obscure ruling from NYS tax department (though I went on NYS tax website to check all the rulings and issued memo on the subject of 20k exclusion and could not find anything to this regard). Calling NYS department is a good idea — though I would probably have difficulty in finding a person who even understands what NUA is and even if I get a positive response over the phone — the NYS auditors do not have to either beleive me or rely on it (unless somehow I would be refreed to something in writing). I would probably ask my tax account to run it through his professional software to see how it is treated. Otherwise I need to make a decision on whether contribute 20k from my IRA or take chances that the tax software is correct in applying NUA basis to the 20k exsclusion. I am also puzzled somewhat why some random (ones in a while) withdrawls from IRA would qualify for exclusion when the wording in publication 36 states “periodic” withdrawls. I guess it has more to do with a semantics of defining “periodic” vs “once in a while” – -what do you think? Thank you again for staying with me on this topic and very good insight.
Permalink Submitted by Alan - IRA critic on Sun, 2019-01-20 00:18
After further research, I think NYS has left this question in limbo because 401k distributions (irrespective of NUA issues) exclusion is worded differently from that in Pub 36 in the Inst for IT 225. These instructions describe the 20k exclusion under S-106 of the subtraction list. S 106 has removed the qualifier “periodic” and just indicates “distributions” from 401k plans. Clearly conflicting info here. But this explains why tax vendors allow for the 20k subtraction, so you could well qualify for the exclusion. As for NYS revenue agents, who knows what they are looking at for guidance?? Again, I don’t think lump sums or NUA is the issue here, it’s whether ANY 401k non periodic distribution will qualify.