net unrealized appreciation

I have a prospect with a P&G profit sharing plan. They just retired after 25-30 years, and have around 200k in
“Company Contributions-Preferred Stock. (It looks as if the “stock cost” is about $16 and a current price/share is $88, around 2000 shares) there is another 200k in “Company Contributions Cash”.

I am under the understanding that if she moves the entire amount/account away from P&G (200k of Preferred Stock into TOD/ non-qualified account and the other into an IRA) that they would only pay ordinary income taxes on the original cost basis of $16, which would be about $32,000 ($16X2000 shares).

Any money they later pull from the non-qualified account would be taxed as long term capital gains (I’m asking)? Obviously the IRA portion would be taxed as ordinary income.

The question is, how do I move the money and not mess up? I am thinking that opening 2 accounts, IRA and non-IRA, would do it. But how to get P&G to send 2 checks? (or any profit sharing plan?)

What are some publications/documentation I could get my hands on to verify to myself and to possibly their tax person?

I hope I have been clear about what help I need,

Jeff



  • Hopefully, client has received a firm quote on the cost basis per share from the plan. If the average cost is 16.00 per share, that is around 18% of FMV and NUA is viable with a % that low.  Review Pub 575, p 16 for details regarding NUA and the requirement to complete a qualified lump sum distribution of the entire plan and any similar plans of this employer.  The number of shares (does not have to be all of them) selected for NUA should be transferred to a taxable brokerage account, while the remainder of the plan would be directly rolled into a TIRA or Roth IRA by the end of the same year. If the rest goes to a TIRA, there will be one 1099R issued for the direct rollover and another for the distribution of NUA shares showing the taxable cost basis in Box 2a and the amount of NUA in Box 6. Note that if there any after tax contributions made to this plan, complexity of the distribution choices is considerable and plan accounting details come into play. 
  • The following article by Michael Kitces includes much useful detail on NUA.
  • https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/


Along similar lines as the original question, I have a follow-up.  The scenario is that an employee who is over 59.5 and is retiring wishes to take advantage of NUA on her preferred shares of stock under her Profit Sharing Trust/ESOP.  There are also common shares of stock in this plan.  She also holds mutual funds in a 401k.  Both the Profit Sharing Trust/ESOP and 401(k) are sponsored by the same employer.  Our goal is that she will utilize the NUA for the preferred shares ONLY which will be directly transferred to a taxable brokerage account which she will pay ordinary income on the basis which is very low ($6.82 per share basis vs $108.77 current FMV).  She will also roll over the common shares in-kind to and IRA.  The 401k will be rolled to the same IRA.  I believe we have hit all of the requirements that this is the first distribution after her triggering events, the account balances of both will be zero at the end of 2019 lump sum by lump sum distributions, and the employer stock (NUA) will be transferred in-kind to the brokerage account.   My question is:  what if the employer later funds a contribution in 2020 FOR 2019.  Will the subsequent contribution in the next year blow up the NUA?  I wouldn’t think so but I can’t find any resource that addresses this specific question.



The employee will have completed a qualified LSD in 2019 of the entire balance of like plans. A later contribution does not change the NUA potential of the shares already distributed. That said, it is always advisable to ask the plan administrator to confirm that one 1099R for 2019 will show the cost basis and NUA of the shares distributed and will not be later corrected due to the later contribution. I am assuming that any contribution of employer shares made in 2020 will be rolled over to an IRA since the cost basis of such employer shares will be too high for NUA. 



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