NUA timing/order ?

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  I have a 401k I have taken nothing out of or touched.  

I would like to convert some of my 401k to an Ira this year. Later this same year, I may exercise an NUA, and pull out the rest of the 401 k.   So the 401k would be empty by the end of the year 

i’m being told I cannot do it in that order. They tell me  I would have to exercise the NuA FIRST and empty the 401k by year’s end.     That doesn’t sound right to me.

Can anyone point to the IRS document which states what the requirement is?  This financial person, or I, am mistaken.

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I'll page @dmertz to see if he has any input. Please check back here later.

[dmertz · Accepted solution]

I'm not sure why you are being told that the order matters.  Perhaps the plan administrator is confused by the requirement that there be no intervening distributions between the qualifying event and the distribution of the NUA shares for there to be a lump-sum distribution.  The statutory requirement is just that to qualify as a lump-sum distribution (a requirement for NUA treatment), a total distribution must occur within a single calendar year and you must not have had any intervening distributions in prior calendar years since your qualifying event such as separation from service.  By emptying the 401(k) within a single calendar year, even if done by multiple partial distributions, the Form 1099-R showing the distribution of the NUA shares should have box 2a Total distribution marked.

It's certainly possible that the plan has a plan-specific requirement detailed in the plan agreement, but I've never heard of a plan agreement that specified that the distribution of the NUA shares be done first.  In fact, it would be clearer if the NUA shares were distributed last since doing so would complete the total distribution.

Still, what would be the problem with distributing the NUA shares later?  With regard to taxation of the NUA shares, it doesn't matter when during the year the NUA shares are distributed.  All that would matter would be the value when the NUA shares are subsequently sold.  The sale of the NUA shares outside of the 401(k) does not have to be done immediately.

See 26 U.S. Code § 402(e)(4)(B) and (D)

https://www.law.cornell.edu/uscode/text/26/402#e_4

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thanks.   I believe the financial person I spoke to is mistaken.  But they think they are right, so it’s awkward.  I can’t point to IRS code, or they don’t understand it .  

thanks so much for your time !

[dmertz]

If they think that the NUA has to be done first and they don't do it, there's a good chance that they will not report an NUA distribution and without that reporting it will likely be difficult to get the IRS to accept that there was a valid distribution of NUA.  There will be no record on Forms 1099-R of the split between basis and NUA.

I don't understand why you would not just do the NUA distribution first the way they want since doing so would make no taxable difference to you that I can see (unless you will be acquiring more company shares in the meantime, but it's extremely likely that there would not be sufficient appreciation on those newly acquired  shares to make NUA treatment particularly worthwhile on those shares).

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I know I want to do a conversion to a Roth out of my 401k of some money.    just want to keep my options open of if I later (in 2024) decide to liquidate the 401k for whatever reason.