NUA and SECURE ACT
I know that “generally” NUA may be an attractive strategy to consider when the basis is less than 30% or so of the value of the holding. This has been determined against the alternative of converting to Roth where, post conversion, the Roth will grow TF and provide a greater benefit than if the shares were kept in a NQ account and subject to taxation on a forward basis. My question is that this analysis seems to have been for the owner of the 401k and presumed a long holding period post LSD. Now that the SECURE Act has instituted a 10 year payout on the inherited funds, how would that 10 year holding period change the calculus on whether NUA is only attractive at 30% or less basis to value? Seems to me that given the 10 year holding period perhaps the percentage could be much higher? Would be interested in thoughts on this.
-m
Permalink Submitted by Alan - IRA critic on Tue, 2022-06-07 14:51
Good point, but would be tough to quantify. Most taxpayers will make decisions based on their own retirement picture and only begin to factor in beneficiary interests well after the LSD decision is made, since many will have 30 years or more to live after the average age for making LSDs. This has always been a question, and most beneficiaries are children of the taxpayer and few of those are EDBs that can still stretch. Of course, NUA can be chosen on a partial number of shares, so the retiree could do some of each, always treating diversification as the prime factor.
Permalink Submitted by [email protected] on Tue, 2022-06-07 14:54
Sorry for my lack of specificity. I’m thinking about the beneficiary who now has the option to take NUA on shares held by deceased owner. They now would be subject to the 10 year holding period and I’m thinking would change the calculus on whether they doing conversion vs NUA. Seems to me that perhaps NUA looks more beneficial to the beneficiary.-m
Permalink Submitted by Alan - IRA critic on Tue, 2022-06-07 16:28
The difference between the beneficiary’s marginal tax rate and the LTCG rate would be a large factor. For example, if in the 32% bracket and 15% cap gain bracket, that’s a 17% advantage for NUA. Between 22% and 15% not so much. If NUA is being used, the LSD must be done in the same year as the first 401k distribution to avoid an intervening distribution. If RMDs are required within the 10 year rule, the LSD would have to be done in the first beneficiary RMD year or in the year the decedent’s uncompleted RMD for the year of death (if applicable) was paid to the beneficiary, if sooner.