401K - NUA Treatment of After Tax Contributions and Earnings in Co Stock | Ed Slott and Company, LLC

401K - NUA Treatment of After Tax Contributions and Earnings in Co Stock

My 401k account holds Company Stock from both pretax and after tax contributions. I am considering an NUA on all shares of Company Stock and understand the following distributions would occur:
1. Pre-tax contributions and earnings for Company Stock go into a Taxable brokerage account, at which time ordinary income tax will be due on the cost basis, and capital gains tax would be paid when I sell those shares;
2. Pre-tax contributions and earnings on non-Company Stock roll into a Trad IRA (TIRA);
3. After tax non Company contributions roll into a RRA;
4. After tax non Company earnings roll into a TIRA;
But unclear on how the following gets distributed:
5. After- tax contributions for Company Stock
6. After tax earnings for Company Stock

I've read that one can choose which shares of Co Stock to use NUA, though understand Fidelity doesn't allow this and takes an average of cost basis of Company stock. Doesn't seem right.

Thanks in advance.

  • The plan accounting and reporting determines the options for the participant. Some will automatically apply after tax contributions allocated to the shares to reduce the taxable cost basis (Box 2a of the 1099R). Others may allow the participant to assign all the after tax contributions to a non taxable direct rollover to a Roth IRA. As you also indicated, most plans use average cost accounting for NUA shares and do not track the purchase cost of individual lots over various time periods. The number of variables here makes this LSD very challenging, and therefore the first thing to do is see if the plan can clearly explain what your options are in view of the breakdown showing on your most recent plan statement.  Once you know what your options are, try to keep them simple to reduce the chance of a foul up or miscommunication. One way to make your choice simpler (if you have choices) is to choose whether you want as much of your after tax contribution total as possible rolled to the Roth IRA or if you want as much as possible used to reduce the taxable cost basis on the NUA shares. Are you sure your % of cost basis to FMV is low enough to warrant use of NUA (should not be over 30% in most cases)?
  • Your category 5 is what I referred to above. Plans either have rules or provide you with options on where these dollars are applied.
  • Your category 6 are the investment gains on those shares. That is either the NUA or if dividends were reinvested in more shares, they become part of the NUA cost basis.
  • Always place proper diversification in front of tax benefits when it comes to holding large amounts of value in a single company's shares.
 

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