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DOB 04/04/1961 I separated from service 55 rule in February and will start taking distributions from my 401(k) in March . I called my company plan administrator and ask about the NUA and the cost basis of the company’s stock and they said in order to get the cost basis I would have to roll it out of my 401 into something else.? And that will trigger the 10% penalty! I’m I missing something are that’s my plans rule ?
2018-02-27 14:50, By: Samson, IP: []

The age 55 separation exception is an IRS rule that the plan cannot retract. Either they will code your distribution on the 1099R as code 2, or you can file Form 5329 and override their code yourself with an exception code. Therefore, if you elect to take an LSD for NUA purposes, you will pay tax on the cost basis, but no penalty. The rep may also not have understood that for now you are only asking for a statement of your current cost basis per share so that you can determine if you want to pursue NUA or not. Typically, NUA is most beneficial if the cost basis is under 25% of the value on the distribution date, maybe a little higher if you need to sell the shares very soon to cover your living expenses. Finally, if you have any after tax contributions in the plan, you will have to determine if those after tax amounts are better rolled to a Roth IRA or used to reduce your taxable cost basis (Box 2a of the 1099R) for the NUA shares.
2018-02-27 19:15, By: Alan S, IP: []

I suggest that you buy (or go to the library) J K Lasser “Your Income Tax”. It has a 2-page narrative with examples re NUA.
Basically, as Alan said, if there is a significant increase in value of the company shares within the 401-K, then you or a tax professional should do the calculations to determine the benefit to you in reduced taxes.
If it is beneficial, the procedure is rather straightforward after you get the cost basis and current value of the COMPANY SHARES:
1. Tell your HR dept that you want to do a LUMP SUM DISTRIBUTION all in the same CALENDAR YEAR of the COMPANY SHARES, ONLY !!! Usually these are the shares that the company contributed or purchased in the 401-K, often as their “matching” contribution, as well as any shares in company stock purchased with your contributions.
2. Do an Electronic Trustee-to-Trustee Transfer of the COMPANY SHARES of stock into a NON-RETIREMENT account at a broker. DO NOT ROLL OVER COMPANY SHARES TO AN IRA.
3. You will receive a 1099-R for this distribution, and will report only the COST BASIS as ordinary income, taxed at the regular tax rates.
4. At any time after this distribution, you can sell any or all of these shares from your non-retirement account. The difference between the per share cost basis and the FMV (fair market value) on the date of the distribution will be taxed as LONG-TERM CAPITAL GAINS. Any increase, or decrease, between the FMV on the date of distribution and the sales proceeds on those shares will be SHORT-TERM gain or loss if sold within 1 year from the date of distribution. If sold after 1 year, then the entire gain is LONG-TERM.
5. You should do tax planning for the year of the distribution, especially if you have significant income from wages/severance/vacation pay. In saved a client a lot of taxes by having him set up his non-retirement account as a margin account for that initial year and the next year, and borrow against the value of his entire stock portfolio. This kept him in the 15% regular tax bracket, and as a result the LONG-TERM GAINS and QUALIFIED DIVIDENDS were taxed at the special -0-% tax rate !!! (By the way, margin interest is deductible, if you Itemize your Deductions.)
6. Make sure to tell HR that you want to do an electronic TRUSTEE-TO-TRUSTEE TRANSFER of the non-company stocks to your IRA. This transfer will not be taxed until you take distributions from your IRA.
I strongly suggest that you use a tax professional who is knowledgeable about NUA. My client’s distribution was $ 700,000 and I saved him $100K in income taxes !!!
2018-02-27 19:44, By: dlzallestaxes, IP: []