Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has net unrealized gain (NUA) on employer securities owned in his 401K account.  I am trying to advise him between distributing the securities from the account or roll over the entire account to an IRA.  Which is best?

Answer: It depends on the amount of NUA, the client’s age, the time that the distribution is needed and the client’s tax brackets.

If the client wants to get NUA treatment for the securities, the taxpayer must take the securities out from the 401K plan and pay tax (plus penalty tax, if applicable) on the purchase price of the securities.

 

When the taxpayer later sells the securities, he’ll pay capital gains tax on the difference between the sales price and the purchase price.  The penalty tax will not apply.

If the securities—or their equivalent value—are rolled over to an IRA, NUA treatment is lost forever.  However, there is no tax or penalty due at the time of the rollover, and the client may defer taxes until required to take distributions at age 70 1/2.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.