By Jeremy T. Rodriguez, JD
First, thank you for the educational opportunity via the mailbag services.
I’m 70 years old (will be 70 1/2 in July this year). I retired in 2014. I have a 401K account (consisting of highly appreciated stocks and cash) with my former employer. Although the majority of the money is pre-taxed, I do have a small portion of the money in in-plan Roth which was established in 2016.
Not knowing the NUA advantage, I made several withdrawals and Roth conversions between 2015 – 2017. From reading the NUA rules, I thought I had lost the NUA privilege for good. However, when I call the saving account administrator, they said that since I have not made any withdrawals in 2018, I still qualify for the NUA treatment this year. This is conflicting information to my understanding. Am I wrong?
If I do qualify, do I need to include my in-plan Roth amount in the lump sum distribution? Also, how should I handle my first RMD if I go with the lump sum distribution.
Your expert advice is much appreciated.
You are correct and the savings account administrator is mistaken. To qualify for NUA tax treatment, the entire account must be emptied by the end of a taxable year once a triggering event occurs. The triggering events are death, disability, separation from service, and attainment of age 59 ½. You don’t have to take a distribution right after a triggering event. You can wait any amount of time. However, once you do take a distribution, the account must be emptied by the end of that year for NUA to apply. If that doesn’t happen, NUA treatment is lost until another triggering event occurs. In your situation, the only triggering events left are disability and death. Thus, if you do not become disabled, you are unable to use NUA, but your beneficiaries could if they inherit the plan account, stock remains, and they follow all applicable rules.
My IRA will be left to my three sons. Must they all take the same option for distribution of the IRA? Can one take payout and other two retain an IRA for future use?
Thanks for your help.
The short answer is yes, if you name all three on your beneficiary designation form and specify a percentage each is to receive. In that case, whichever one wants the lump sum or even periodic withdrawals can elect to do so. The others can utilize the stretch distribution method. However, unless you decide to split the account three ways during your lifetime, they will need to remember to split that account before December 31st of the year after your death. This way, each of them gets to use their own life expectancy for post-death beneficiary Required Minimum Distributions.