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Level 2

Question

Net Unrealized Appreciation (NUA)

Forum|Forum|2 years ago
July 22, 2023
2 replies
0 views

I am considering whether to take a distribution of company stock in my 401K and transfer to a brokerage account then report net unrealized appreciation. I was trying to model this in Turbotax assuming I will receive a 1099R. For example purposes, I entered the Gross Distribution ($100,000) in Box 1. Entered taxable amount (basis) in Box 2 for $40,000. Entered $60,000 in Box 6 for NUA.

TurboTax should only be taxing me for the taxable amount of $40,000. Instead it is taxing me for the Gross Distribution of $100,000.

I would appreciate if someone could advise me as to the proper way to fill out the form. As I do not have an actual 1099-R form in hand, it's guesswork for me at this point. Thank you.

TurboTax Deluxe Online

Mike9241

Level 15

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.

MasterWaterskier

Level 2

I have an add on question to this topic @Mike9241

I was separated from my job at age 55 and took advantage of the NUA option and moved 100% of the company stock to a brokerage account last year(2025). I believe I was able to do this and would avoid the 10% penalty. I did get a 1099-R based on this activity and the numbers, taxable amt, box 6 NUA, etc all look good.

In the 1099-R, box 7 the distribution code is 1 which seems incorrect. I believe maybe this should be 2? Based on my activity and method I understood that I would avoid the 10% penalty and only pay tax on the Box 2a amount, but it appears Turbo Tax isn't work correctly or my 1099-R is incorrect.

Is there a different form or do I need to do something differently with the tax forms?

Thanks for any help.

Romper

Level 6

I'm no tax expert but it would appear Code 1 is incorrect. I would question the broker.

I assume you did a hands off known as an "in-kind" transfer between the 401k and a taxable brokerage account.

In support of Code 2, check this IRS website.

https://www.irs.gov/pub/irs-prior/i1099r--2025.pdf

Then go to Table 1 on page 18, it states:

2—Early distribution, exception applies.

• A distribution from a qualified retirement plan after separation from service in
or after the year the participant has reached age 55.

A 401k is a qualified retirement plan.

It would appear the 1099-R is incorrectly showing Code 1 from Table 1. Perhaps because they didn't consider Code 2.

1—Early distribution, no known exception.

Use Code 1 only if the participant has not reached age 591/2, and you do not
know if any of the exceptions under Code 2, 3, or 4 apply.

Also, if you look at this IRS website:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

It states:

Exceptions to the 10% additional tax

"the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit or defined contribution plan)"

andreeank2

Level 2

Treatment of Net Unrealized Appreciation when moving the stocks to a brokerage account and securities are consequently sold*

https://www.irs.gov/taxtopics/tc412#:~:text=Net%20Unrealized%20Appreciation,-If%20the%20lump%2Dsum

*under the assumption the taxpayer elected not to include the NUA in the income in the year the securities were distributed.

NUA is a special tax treatment that relates to distributions of appreciated employer securities from an eligible employer-based retirement plan as a part of a qualifying lump-sum distribution.
The taxation of the securities is based on the cost basis of the securities and the amount that they have appreciated while in the plan.
The cost basis of the securities that are distributed in-kind will be taxed at ordinary income tax rates when you take a qualifying lump-sum distribution that includes appreciated employer securities. It will be taxed in the year you take the distribution from the plan. A 10% premature distribution penalty may apply.
Taxation of the appreciation, the NUA, following a lump-sum distribution is deferred until the employer securities are sold or disposed of.
When securities are sold, any NUA is taxed at the long-term capital gains rate. Any additional gain is taxed based on the holding period of the securities after they are distributed.
You can elect not to use the NUA tax strategy.
NUA is not available and is irrevocably forfeited if the employer securities are rolled into an IRA.

TurboTax does not have a native interview for the securities sold under NUA. The customer will receive a 1099-B with cost basis $0.

If the stock was hold for more than 1 year in the brokerage account the entire amount can be entered as per 1099-B, box "cost basis is incorrect or missing on my 1099-B" checked, and cost basis = cost basis of the stock in 401K (box 2 of the 1099-R)

For stock hold for less than 1 year, sale has to be broken in two pieces in order to tax the NUA as long term capital gain:

One part for the long term capital gain of NUA:

The type should be long-term did not receive 1099-B, cost basis = 0, proceeds = NUA. The result will be a long term capital gain for the amount of the NUA.

Second part for the consecutive appreciation of securities, long-term or short-term capital gain/loss, depending on the holding period of the securities in the hands of the distribute.

For the Net gain/loss realized in the sale – complete first part of the interview based on the information form 1099-B (cost basis = 0)
The box "cost basis is incorrect or missing on my 1099-B" checked
Cost basis = NUA

The result will be capital gain/loss equal to the difference between the net unrealized appreciation at the time of distribution and the market value at the time of selling the stock.