NUA Triggering Event Question | Ed Slott and Company, LLC

NUA Triggering Event Question

61 year client wants to do in-service distribution this year executing NUA then retire in a 1-2 years. We'd like to utilize the age 59.5 triggering event now continuing to save in his 401K then use separation from service triggering event upon retirement. Did we miss the 59.5 window? Did we have to do this in the calendar year of turning 59.5?

Age 59.5 could still be an active triggering event, as long as there were NO other distributions from the plan after hitting 59.5 and prior to the year of the LSD. However, the LSD requirement is very likely disqualify NUA since a qualified LSD must result in the entire balance of the 401k and similar plans (such as ESOP) being fully distributed by year end. How would that occur if client plans to continue contributions to the 401k?  Even if client was able to closely time the LSD at year end such that the plan balance was 0, it is questionable that the 1099R would show the Total Distribution box checked if client was still participating. Due to the timing issues involved here as well as employer discretion in completing the 1099R in a manner acceptable to the IRS, it appears a better plan would be to wait until the client actually separates from service, as that would solve both the triggering event question and the plan balance issue. Or at least resolve these questions with the plan administrator. Remember, if the shares are distributed and client is then blindsided by a 1099R not showing NUA because there was no LSD or any other reason, client will be stuck with an unplanned tax bill if the 60 day rollover deadline has passed.

IRS Notice 89-25, 1989-1 C.B 662 Q&A-6 indicates that the balance to the credit is determined as of the first distribution after an LSD qualifying event and that additions made after that date during the remainder of the year can be included in the balance to the credit, but are not required to be included.  Not distributing these additions in the same year might result in box 2b Total distribution of the Form 1099-R being unmarked, but not having that box marked under these circumstances would not disqualify the distribution from being an LSD (although it might require some explanation to the IRS).  (I'm not sure how investment gains and losses would figure into this, particularly if the LSD was not accomplished entirely with a single distribution.)


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