Reverse distributed 401K via NUA into Rollover IRA | Ed Slott and Company, LLC

Reverse distributed 401K via NUA into Rollover IRA

I had to distribute my 401k via NUA option due to delicate situation and had to sell off the stock (via in kind trade from stock fund from my 401K) the same day the shares deposited into my brokerage account. Now the situation cleared and i still have 2 weeks before 60 days to avoid tax implication. I want to put everything back into rollover IRA so there is no tax implication. Fidelity told me i can not reverse that because i sold off the stock in brokerage account already. Could someone please help advise how I best address this and defer tax as if these activtiies did not happen?

Many thanks for your help and advise!

The distribution of the employer shares are still eligible rollover distributions. Per Pub 590 A and 575, the participant can either roll over the shares OR the proceeds from the sale of those shares within 60 days. But the proceeds of a sale for which NUA is reported is not eligible for rollover. Tell Fidelity that you are not reporting either the taxable cost basis or the NUA on the shares sold. You must rollover the exact proceeds of the sale whether more or less than the value distributed and reported on the 1099R. You do not report any gain or loss on the sale in the brokerage account, but you will probably have to report it and then back it out so the IRS knows you addressed the 1099B. The backing out is what you will need to explain. 

Thanks very much for your feedback. Fidelity shared that they had to report the NUA on 1099 from 401k side if the transaction was created. Is there a way not to report if i put money back into rollover IRA within 60 days? Is there a way to ask from 1099B side or some other ideas? Please advise. thanks very much again!

Assuming that you roll over the entire proceeds from the sale, it must be reported like any other rollover, with the gross amount (box 1 of the Form 1099-R) being included on Form 1040 line 4a and none of the amount rolled over being included on line 4b, with the word ROLLOVER next to the line.   The Form 1099-B would then be reported as I indicated earlier, with a cost basis equal to the sales proceeds so that the sale is nontaxable (no gain or loss).  It should be straightforward and I would not expect the IRS to question the reporting.  Tax-return software should handle it easily.

I would expect the Form 1099-B to show this as non-covered short-term, so you should be able to effect a zero taxable amount for this Form 1099-B on Form 8949 by reporting a cost basis equal to the proceeds (assuming that you roll over the entire amount of the proceeds as described by Alan_iracritic).

Yes, Fidelity will report the distribution of shares cost basis and NUA on a 1099R. You would report this as a rollover on line 4 of Form 1040. That erases the income on the 1099R. The 1099B has already been addressed, as you would report that on Form 8949 and show a cost basis equal to the amount received. There will be no gain or loss. That eliminates all current tax liability for this distribution. Remember that you must roll over the full proceeds from the sale of shares (amount on 1099B) even though it will be more or less than the 1099R distribution. There should not have been any withholding on either of these transactions.  Tell your IRA custodian that you are making a rollover contribution with your personal check so they code it correctly (even though the check is probably much larger than a regular IRA contribution. You probably will also have another 1099R showing a G coded direct rollover of other amounts in the 401k besides the employer shares. That will also go on line 4 of Form 1040.

Thank you both so much for the explaination. This is so very helpful. My sitatuation was stock in kind trades/NUA sell off came from two 401k accounts due to emegency situation. Would I be able to do roll over to IRA for total of both accounts? Many thanks again!

Yes, if the situations are the same for both accounts you could just add the 1099R amounts together for reporting purposes. You had 2 former 401k plans each with employer shares? If so, I imagine that the 60 days would expire on different dates?

the other the next day. Any implications there? Also, is there any benefit I keep it out as is? It incurrs huge tax obligation for me this year, but I want to look at long term as well. Btw, I am about to be 49 years old so still some years before i can really retire. Many thanks again!

NUA is usually not beneficial if the cost basis is more than 30% of the current stock value. In addition,  you will owe the 10% penalty on the cost basis, so you would be better off to defer all the taxes and roll the balance over to an IRA. What is your cost basis %?

at a large lumpsum. Thanks again for your input.

No, I asked what your cost basis % is for the employer shares. In other words, if the cost basis which is taxable in the current year (plus 10% penalty) is $30 per share and the shares are worth $100 now, your cost basis is 30%. If higher than 30% you would do the rollover and decline NUA UNLESS you need this distribution to pay for current expenses.

for 401k account #1 is ~20% of stock price and 401K account #2 is ~48% of stock price. Blended is around ~25% cost base overall. A follow on question, may i treat these two accounts differently? meaning rollover the #2 due to high cost base and leave the account #2 as NUA as is? Please advise. Many thanks again!

You can roll over the account 2 distribution only and use the more favorable account 1 distribution for NUA. You can even roll over a portion of Account 1 if you wanted to. You only have to use the number of employer shares you wish to for NUA purposes.

Thanks very much! I'm wondering if i have the option to roll over only the taxable portion (principal) in account #1 and keep the account #1 NUA out and pay for long term capital gain on the portion?  Another question is - i was advised i can only do 1 rollover per 12 month.  Does that mean i can only roll over one 401K account balance to IRA any ways given the $ comes from 2 accounts? Please advise. Many thanks again!

  • No, that cannot be done. Any shares rolled over eliminate current tax on those shares and also eliminates the NUA.  Accounting should be done on a per share basis with cost basis and NUA a component of each individual share.
  • That said, there has been a few past attempts to roll over shares equal to the cost basis and then report 0 cost basis on the remaining shares, all NUA. This method became known as the "Frank Duke" method for the tax payer that tried it. In tax conferences conducted by the IRS, the conclusion was that the IRS would reject this approach (which substitutes aggregate basis for per share cost basis) if they knew what they were looking at.  

2 more questions1. Since i sold the stocks in both accounts the day NUA shared deposited into brokerage account, do i need to rollover shares into IRA or the amount i sold them for into rollover IRA? 2. Since i have two separate 401k Accounts, can I rollover combined total amount to IRA and treat this one rollover?Many thanks again!

You must roll the exact proceeds of the share sale into the IRA. You cannot buy other securities and substitute them for the cash or even re purchase the shares that were sold and roll them over. You can combine the amount you wish to roll over into a single rollover IRA contribution. You will have two 1099R forms, one from each plan to report as a distribution, but as long as the 60 day deadline is met for the rollover of each distribution it does not matter whether you combine the amount you want to rollover into a single contribution or not. While you have considerable flexibility, it will be easier to report and for the IRS to understand if you simplify it as much as possible, such as rolling over all of account 2 shares and keeping the account 1 shares for NUA.

. Thank you very much!

One more question - when I do this 60 day indirect roll over, should i rollover the exactly $ on the statement from 401K distribution of the shares of value into personal brokerage account, or the proceeds of the sale of in kind stock shares in personal brokerage account + the check of partial shares converted value during in kind stock trade? Thanks very muc again!!!

One more question - when I do this 60 day indirect roll over, should i rollover the exactly $ on the statement from 401K distribution of the shares of value into personal brokerage account, or the proceeds of the sale of in kind stock shares in personal brokerage account + the check of partial shares converted value during in kind stock trade? Thanks very muc again!!!

The amount deposited into the IRA must equal the proceeds of the sale of in kind stock shares in personal brokerage account + the check of partial shares converted value during in kind stock trade.  However, the amount that you treat on your tax return as the amount rolled over will be the amount shown on the distribution statement from the 401(k), the amount that appears in box 1 of the Form 1099-R.  The result will be the same as if the in-kind shares had been deposited into the IRA and then sold.

I'm very grateful to your insight and help! Thanks very much again. This is cystal clear and helps great deal on my decision on next steps. Thank you very much again!

 

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