When you take an in-kind distribution of employer securities from your retirement plan as part of a lump-sum distribution, you generally pay tax on the cost basis (the trust’s cost basis for the security) of the securities at ordinary income rates in the year of the distribution. A 10% penalty may apply before age 59½.
The employer securities are then held in a nonqualified brokerage account and any gains, either while the securities were in plan or after the securities were distributed from the plan, are not taxed until you sell them.
When you sell the securities, you will pay taxes at the long-term capital gains rate on any NUA and the applicable short or long-term capital gains rate on any additional appreciation since distribution. The applicable capital gains rate on any additional appreciation depends on the holding period after the distribution from the retirement plan.
A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Additionally, a lump-sum distribution is a distribution that's paid:
- Because of the plan participant's death,
- After the participant reaches age 59½,
- Because the participant, if an employee, separates from service, or
- After the participant, if a self-employed individual, becomes totally and permanently disabled.
your scenario does not appear to be a lump sum distribution.
There are additional requirements that must be met as part of the NUA rules. Within one year, you must distribute the entirety of the vested balance held in the plan, including all assets from all of the accounts sponsored by the same employer. Certain qualifying events must also be met. You must have either separated from the company, reached the minimum retirement age for distribution, suffered an injury resulting in total disability, or you must have died.
therefore, as you describe the situation the whole $100K is taxed as ordinary income because it does not meet the NUA rules
on the other hand, if you meet the NUA rules the $40K is taxed as ordinary income and if you sell immediately in the brokerage a/c you get a 1099-B showing proceeds of $60K. With tax basis of zero you now have your $60K LTCG
Assuming when i enter $100 for gross distribution, $40 as taxable, and $60 as NUA only $40 shows up as taxable but I'm using a different version of Turbotax so why you get $100K as taxable is unknown if that's what you filled in.
