401k qualifying event

Submitted by alex lester on Tue, 2020-01-14 21:48

I have separated from service with my old company when I was 54 years. I am 58 years old now. I still have 401k with my old company. I would look to rollover my 401k from the old company to IRA and brokerage account (for NUA purposes) now. Can I do this? Or because I was under 55 when I separated from my company and still under 59.5 now I am prevented from doing so without incurring penalties.



Submitted by Alan - IRA critic on Tue, 2020-01-14 23:56

  • To utilize NUA, you must take a qualified lump sum distribution (LSD) following a triggering event, and you cannot have taken a distribution in an intevening year before the LSD year. If you took such an intervening distribution, then you have to wait until age 59.5, which becomes a new triggering event before you can do the LSD. If you have never taken a distribution after separation, you could do the LSD this year.
  • You can separate and 54 and still qualify for the 10% penalty waiver if you reached 55 later in that same year. Otherwise, you will owe the 10% penalty on the taxable cost basis of the NUA shares unless you wait until 59.5 to have the shares distributed. 


Submitted by Nicole limson on Wed, 2020-01-15 02:48

Who and how the penalty amount is being assessed for basis of company stock? Does it show up somewhere on 1099R or gets reported to IRS by other means? 



Submitted by Alan - IRA critic on Wed, 2020-01-15 03:04

The 1099R would be coded 1 in Box 7 indicating an early distribution. If you separated anytime in the year you reached 55 or later, that code would instead be 2 indicating no penalty due. If you wait until 59.5 then the code is 7 also indicating no penalty. 



Submitted by Nicole limson on Wed, 2020-01-15 04:41

One of the ways to waive this penalty is apying the amount of ESOP basis  for “tuiton/room and board” of your dependant. Do I  have to let the plan know that  I am planning to apply this distribution to “tuiton/room and board” so the plan would change the code accordingly? Or I have to reconcile this at the later date  myself when I am preparing taxes? If I do it myself — shoud I attach some kind of a letter to my tax return or simply correct 1099R myself by submitting appropriate IRS form. If it is submittal of an  IRS form — do you know which one that would be for the NUA basis distribution waiver.



Submitted by Nicole limson on Wed, 2020-01-15 08:11

I think I found an answer to my previous question — the exception mentioned above only applies for IRA and not 401(k). However,  can I do a lump sum distribution for NUA treatment at the beginning of the year if my triggering event of turning 59.5 would only occur at the END of that year. Thank you.



Submitted by Alan - IRA critic on Wed, 2020-01-15 14:37

  • The age 55 penalty exception only applies to the 401k, but that is the distributing plan for the shares on which the cost basis will be taxable income and subject to penalty.You cannot use the higher education costs as a penalty exception on the NUA cost basis because that exception only applies to IRA distributions. 
  • If you cannot use separation for your triggering event because you have taken a distribution after separation and prior to the LSD year and therefore have to wait until 59.5,  you must wait until the day you reach 59.5 to be able to use that as a new triggering event, and therefore your distribution must also be after that date to have a qualified LSD. Of all these dates, the only one that applies to the entire year is the age 55 separation exception to waive the penalty for the 401k distribution that is not rolled over. As for triggering events, if you are able to use separation, it must be after the separation and if you are using age 59.5, the distribution must be after 59.5. An LSD is a total distribution completed within a calendar year, and the plan will have to check the “total distribution” box on all1099R forms for that year. That means you could do the IRA direct rollover before reaching 59.5, but could not distribute the NUA shares prior to that date. Most people request the entire distribution on the same date.


Submitted by Nicole limson on Wed, 2020-01-15 16:08

Thank you Alan. I am still a bit confused. In my case if I do LSD and NUA treatment before reaching 59.5 — I can do this with the only bad consequence being a 10% penalty on basis of of the NUA shares?



Submitted by Alan - IRA critic on Wed, 2020-01-15 16:25

  • That is correct, as long as you qualify to use separation from service as your triggering event. I take it that you did NOT reach age 55 in the same year you retired at 54, and therefore do not qualify for the penalty waiver on the taxable cost basis showing in Box 2a of the stock share distribution 1099R. Note that you do not have to utilize NUA on all your employer shares. If you distributed half of them for NUA purposes, the taxable income in 2a and the 10% penalty on that amount would be cut in half. The rest could be sold within the plan or rolled into your IRA and then sold if you wanted to. NUA is most beneficial if your cost basis does not exceed 25% or so of the FMV, and the lower it is the lower the tax and penalty due for the distribution year. 
  • Note that if you will pay unreimbursed medical expenses in excess of 7.5% of your AGI in 2020, you can use that exception to waive at least some of the penalty on the cost basis if you do the LSD this year. 7.5% goes back up to 10% in 2021.


Submitted by Nicole limson on Wed, 2020-01-15 20:34

Sorry for the barrage of questions. One more clarification. If I separate from service early in the year when I am 54 and later in the same year I turn 55. But wait to to take my LSD and NUA until I am 58 — then I will not be qualified for the waiver of 10% on NUA basis? This waiver would only work if I took the distribution  by the end of the same year when I turned 55 — correct?



Submitted by Alan - IRA critic on Wed, 2020-01-15 20:57

  • Your separation date can be anytime in the year you reach 55 and you will qualify for the age 55 separation exception. For example, if you 55th birthday is in November, you can separate in Feb of that same year and still qualify. If so, the 1099R for the employer share distribution should have code 2 in Box 7. If it doesn’t, you can override Code 1 by filing Form 5329 with your tax return showing exception code 02 on the 5329. That eliminates the 10% penalty regardless of which year you eventually take your LSD.
  • As for a qualifying LSD, after your separation if you do not take any distributions until your LSD year you will have a qualifying LSD for NUA purposes based on separation from service as a triggering event. You can therefore request the LSD in any year thereafter and qualify.
  • But if you DID take a non LSD distribution between 55 and 59.5, then you must wait until 59.5 and again qualify using age 59.5 as a new triggering event.  59.5 is the last triggering event you can have other than death or total disability.
  • Verify with the plan administrator that your distribution qualifies for NUA before requesting it. That avoids getting a 1099R later that does not include NUA. 
  • This article explains NUA in more detail:   https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/


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