NUA Stock Cost Basis Allocation | Ed Slott and Company, LLC

NUA Stock Cost Basis Allocation

While researching the process for rolling over NUA company stock from my 401k plan I came across an article concerning an option of transferring stock that is equivalent in value to the Cost Basis portion of the company stock in the 401k to a traditional IRA and transferring the remaining stock equivalent to the NUA portion of the stock to a non-qualified brokerage account. The article stated that the Cost Basis could be allocated 100% to the stock transferred to the IRA and thus avoid any taxation on that cost basis for the year of the lump sum distribution. Unfortunately the date on the article was 2012, so I was interested in knowing if that option still exist or was it somehow ruled out by more current IRS rules indicating the basis has to be allocated across all the stock and not just 100% allocated to the portion of stock rolled into an IRA? The stock in my 401k is held in a "equivalent stock fund" and therefore has no true cost basis per share assigned to it. I appreciate any insight on this cost basis allocation option.

  • There have been several discussions on the "Frank Duke" method. You can enter his name in the search function and get a list of the threads. In short, the IRS has never clarified this question, ie whether the cost basis and NUA can be aggregated over all shares or whether they must be an equal component of each share.  A link to the longest and most detailed thread follows.
  • You have a unitized stock fund in your plan.  If you elect NUA, the plan must convert your units to actual shares and distribute some or all of these shares to your taxable brokerage. If you wanted to roll the IRS dice using the Frank Duke approach, you would then to a 60 day rollover of the number of shares that had a total value of your cost basis. Sec 402(c)(2) states that in a rollover, the pre tax amounts are deemed rolled over first (your NUA Cost basis). However, the NUA is itself pre tax, just due to be taxed later at sale, so it is not clear if the IRS would look at 402(c)(2) as applying in this case.
  • Obviously, some number of taxpayers have taken the aggressive position of executing this, and reporting as such. As in past cases, if some of these returns were not questioned that should not be viewed as approval of this method, more likely the IRS did not understand what was done or what the return indicated. Therefore, if you pursue this you are rolling the dice with respect to back taxes and various penalties. Also, note that each share you sell later on would have no cost basis and the proceeds would all be cap gain. The NUA portion would not receive a basis adjustment upon your death.

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