Propose distributing 401k into Roth, TIRA and NUA

Submitted by C BP on Mon, 2019-10-21 19:33

401K account includes:

– After-tax: A
– Pre-tax: B
– Prior company plan: C
– ESOP: D

I separated from the company approx 25 years ago and left the 401k there. No action or distributions have been taken since, apart from dividend reinvestment in the form of company stock into the ESOP account.

The After-tax and Pre-Tax accounts include company stock, as well as other asset classes. The company stock in the After tax, Pre-tax and Prior company plan accounts represent approx. 90% of the oldest/lowest cost basis stock, which is about 15% of present stock value. ESOP is receiving fund dividends in the form of new company stock, so it’s cost basis is relatively high compared to the older stocks.

I am approaching 59-1/2 and would like to roll over the 401k to liberate some funds at lowest tax rate and remain invested in some of the others.

Initial thoughts are:
– roll over After tax account completely into a Roth IRA;
– make an in-kind distribution of the low cost basis company stock in the Pre-tax and Prior company plan accounts in order to realize NUA of that stock; and
– roll over ex-stock Pre-tax account and all of ESOP account into TIRA.

For the After-tax account, rolling over into a Roth would seem to be better tax-wise than making an in-kind distribution, as the Roth is completely tax free on distribution regardless of income level (after a 5 year waiting period?), where as the post-NUA stock would be tax free dependent upon capital gain rates and income level. However, I am not sure if the after tax contribution somehow plays a part in the low cost basis calculation (perhaps it helps to reduce it?). If so, would it be better to keep all of the company stock in the basket for in-kind distribution and NUA treatment?

If it would be possible to segment the stocks as proposed, it is unclear if I can relay upon the company’s cooperation to structure the distribution as described, as the company would need to compute the cost basis for stocks in the pre-tax and prior company plan accounts only, without the after-tax or ESOP contribution. Must the company compute a cost basis for the specific election of stock that I make? Given that the total number of present shares is approx 90% of the original number of shares, I would be ok with a pro-rata calculation, even though the shares in the ESOP would have a much higher cost basis, if it came to that approach or nothing.

Can you advise if you would recommend another distribution approach or any suggestions as to implementation of the one proposed?



Submitted by Alan - IRA critic on Tue, 2019-10-22 00:09

  • You will have to find out from the plan administrator whether plan accounting will apply your after tax non Roth contributions to reduce NUA cost basis, if you are free to instead apply it to other plan assets to fund a Roth IRA direct rollover, or if you can split the after tax money in your desired combination to the above two amounts.
  • How do you define the “prior company plan” account?  Was this a rollover from another former employer into this 401k plan?  If so, there is likely no after tax contributions from those other plans and no eligible shares for NUA from those other plans that would have been tracked by the 25 year old employer plan. NUA shares and after tax contributions balances would be limited to such contributions you made directly to the plan you left 25 years ago. 
  • Most plans account for employer share cost basis using an average cost, and will complete a 1099R accordingly. If you attempt to sell the high cost shares or roll them over, the IRS might well challenge your treatment regardless of how detailed your records are about the intial cost of those shares.
  • If you have received any Sec 404k dividend payments, those do not constitute intervening distributions for purposes of a qualified LSD. Other reinvested dividends just increase your cost basis as you indicated. A qualified LSD must distribute the entire balance of the plans you listed including the ESOP within a single tax year, and soon it will be pretty late to attempt to complete the LSD this year.
  • Since there are so many variables at work here, you should probably schedule a call with the best resource the plan administrator employs who understands all these issues. However, no one can predict how the IRS will react to any aggressive cost basis accounting not clearly documented by the plan and the 1099R itself. In other words, the issue is cost basis per share vs average cost basis vs aggregate cost basis and partial rollovers.


Submitted by C BP on Tue, 2019-10-22 08:05

Thank you Alan for your feedback, it is greatly appreciated. “Prior company plan” was from an earlier company for which I worked and that was acquired by the present company subsequent to my departure.  From my records, it appears that acquisition involved separating company matching stock for pre-tax and after-tax contributions, with the company matching stock I held in a first account (which became the present “prior company plan” account) and the pre-tax and after tax contributions held in a second account.  First company stock held in each of those accounts was converted (share number and price) to the second company’s stock. I did not make any (direct) contributions to the present company, as I had separated from the first company before the acquisition.  Therefore, I assume that the present “pre-tax” and “after-tax” accounts originate from those accounts of the first company, and that the stock held in the  “prior company plan” originate from the matching stock of the first company.  Would these assumptions seem reasonable? As both the pre-tax and after-tax accounts include investments in several non-stock assets (shares in US equity fund, an international fund, a stable value fund and a target date fund), wouldn’t the company’s accounting plan be required to permit the rolling over of the pre-tax non-stock assests into a TIRA?  Assuming this is the case, I would assume that accounting for the rolling over of after-tax non-stock assests into a Roth account would also be possible, but as you note I need to confirm this with the plan administrator. I take your larger point that I will need to get more information from the plan administrator.  I have approx. two years before I turn 59-1/2 to get my ducks in a row on this, and so I am wanting to understand what are the important questions I need to raise with the administrator to permit the above desired distribution.  A final question, how far out from my distribution date would you recommend I start the mechanics of requesitng the distribution.  From your message, it appears that 3 months may be cutting it close, so perhaps 6 months? Kind thanks for your feedback.



Submitted by Alan - IRA critic on Tue, 2019-10-22 16:09

  • Thanks for the additional helpful info. Your assumptions appear logical, but the split between shares acquired by matching vs. other funding sources is likely no longer material. The plan must allow you to roll over any of the assets to a TIRA, and Notice 2014-54 clearly allows you do request a split direct rollover to TIRA of pre tax amounts and to a Roth for the after tax amounts. Therefore, the wild card here is the viability of incorporating NUA and it’s diversification challenges into the basic direct rollover scenario. That would depend on a cost basis quote indicating that the gross cost basis was low enough, preferably under 25% of FMV or somewhat higher if you needed to sell the shares to meet expenses. Of course, you could diversify even quicker if the shares were rolled to an IRA and immediately sold with no tax consequences.
  • While they maintain an accounting category for employer shares acquired with after tax contributions, it is not clear whether the plan allows you to assign the after tax amount to other assets, which would allow you to roll over all the after tax contributions to a Roth in exchange for the higher taxable cost basis of the shares you select for NUA. 
  • You might be able to get a head start by asking for an NUA quote now, even though whatever taxable cost basis (Box 2a of the company shares 1099R) would be subject to the 10% penalty if you acted before reaching 59.5 to the day.  You could still ask the questions knowing that you probably will wait to 59.5 to flush out your options with respect to the company shares.
  • Another question to ask is whether the company would report average cost basis or maintains accounting showing the different cost basis of various lots that would allow you to select only the lower cost basis shares for NUA, and either selling the others in the plan (if you can) or right after rolling them to an IRA. I think that the ESOP shares must retain their own separate cost basis, probably much higher due to the decades of reinvested dividends. If so, it’s more likely to you could select only the non ESOP shares for NUA even if the accounting did not provide breakdown for those shares by lot.
  • The challenge is locating someone in plan administration that understands both the tax laws, the plan provisions, and what flexibility you have.
  • The lead time in starting the NUA LSD would depend on how much you knew in advance. Once you know your options for distribution, the actual distribution could probably be ordered as late as early November in the LSD year. Extra lead time would be needed to confirm that your expectations are accurate and still current and get a current cost basis quote. 
  • This fact pattern is probably the most challenging – having after tax contributions and NUA potential together. The IRS will almost surely be guided by the 1099R for the taxable distribution with respect to NUA with your NUA per share determined by dividing Box 6 by the number of shares distributed to your taxable brokerage account. Any further breakdown of the cost basis by lots of the shares actually distributed could trigger an inquiry, and your changes of problems are much less if you have some accounting breakdown provided by the plan itself showing the breakdown. Using just your own records would be more challenging.


Submitted by C BP on Tue, 2019-10-22 21:05

Thanks Alan for your insight; I will need to digest some of the points you’ve made.  I’m embarrased to say that the possibility of your suggested (and more simple) two-pronged distribution in which pre-tax assets are distributed to a TIRA and eveything else distributed into a Roth, did not occur to me.  My thought was that I would need to use NUA for the company stock and it was just a question about the best way to do that.  In the pre-tax/after-tax distribution approach, how would the prior company stock be characterized, pre-tax or after-tax stock?   Prior company stock accounts for 3/5 of all stocks, stock in each of the after-tax and pre-tax accounts is a little less than 1/5 of all stock, and the ESOP holds only about 1/10 of all stock.  So the characterization of the prior company stock would be the most important.  If prior company plan stock is considered pre-tax (which is what I’m thinking), its tax treatment on distribution if rolled into an IRA now would be less advantageous than on distribution after NUA.  Diversification is important, but I’m bullish on the company for the next 5-10 years, and would likely retain all of the stock in a brokerage account, periodically selling enough of the shares to approach the 0% capital gains ceiling during the first few years after 60.   I’m still over my head, but very must appreciate your thoughts and guidance.



Submitted by Alan - IRA critic on Wed, 2019-10-23 01:04

  • Yes, NUA is entirely optional, and often over rated. With respect to the after tax contributions, many plans automatically use them to reduce the taxable cost basis If you elect NUA. Each dollar of after tax contributions can either go to reduce cost basis for NUA or for a non taxable Roth rollover, but cannot be used for both.
  • Whether you must apply the after tax amount to the company shares is determined by plan accounting. Of course, the after tax amount and the gross cost basis are not going to match up exactly, and you would have to determine which shares you wanted to use for NUA and then see how the cost basis for those shares compares with your after tax dollar balance. This depends on alot of variables.
  • I’m not sure that some of the statement breakdowns matter for former employees. The breakdown between pre tax and after tax is important, but whether shares came from matching contributions or elective deferrals/after tax contributions would not matter now.


Submitted by C BP on Wed, 2019-10-23 10:39

Thanks Alan, you brought alot into focus. Greatly appreciated and best regards, -CB



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