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I will be turning 59 1/2 this year, which is one of the triggers that allows me to use the NUA exception on company stock in a 401(k) https://www.kitces.com/blog/net-unrealized-appreciation-irs-... The stock has done well since I retired, and has grown into a higher amount than I would normally allocate to a single stock, but I have been holding onto it because of the NUA exception.

I plan to have the stock transferred to my taxable brokerage account shortly after reaching 59 1/2. Because using NUA requires that the entire 401(k) be distributed in the same year (and my 401(k) provider requires that it be done at the same time), I also plan to roll the rest of the 401(k) account into a Traditional IRA as a trustee to trustee rollover at that time.

It is my understanding that the cost basis of the NUA stock will be considered an ordinary income distribution from the 401(k). As such, it requires that at least 20% of the cost basis will need to be sent to the IRS as withholding from the 401(k). My plan is to withhold that money from the amount that I will roll into the Traditional IRA. This will result in a total ordinary income distribution from the 401(k) of 120% of the cost basis - 100% from the stock transfer and 20% from the withholding.

I then plan to sell enough of the company stock to get my allocation back where I am comfortable with the single stock risk, generating (mostly) long term capital gains on the amount over the basis. (Depending on how the stock does between when it hits my brokerage account and when I sell, I recognize that there may be some short term gains/losses.) I will then use some of that money to do a 60 day rollover back into the T-IRA to repay the amount that was withheld.

Have I made any bad assumptions? Have I missed anything I should be taking into consideration?

AJ
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AJ

Have you looked carefully at what tax rate(s) the initial distribution push you into? Do you have other income or events expected to increase your taxable income? Sounds like you are going to eat a really large tax burden this year.
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Have you looked carefully at what tax rate(s) the initial distribution push you into? Do you have other income or events expected to increase your taxable income? Sounds like you are going to eat a really large tax burden this year.

Being retired, I can control my income to a large extent. I have been taking withdrawals from my 401(k) using the rule of 55 for living expenses and tax withholdings. (Using my 401(k) this way is the reason I didn't do the NUA shortly after I retired, which was another allowable trigger point.) I typically do the tax withholding in December. The withholding for this distribution will be less than that, so I will adjust the December withholding to account for that. Part of the cash that I will generate by selling the company stock to get down to my desired allocation can be used for living expenses, instead of additional withdrawals from other retirement accounts.

I have also been doing Roth conversions (also typically in December), so I will need to adjust the Roth conversion amount this year to account for the NUA basis distribution to avoid going over the top of my desired bracket.

AJ
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I will then use some of that money to do a 60 day rollover back into the T-IRA to repay the amount that was withheld.

Have I made any bad assumptions? Have I missed anything I should be taking into consideration?


I feel a bit like Eeyore but maybe be sure there's a back up for you on the 60-day rollover process. Things happen.
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I feel a bit like Eeyore but maybe be sure there's a back up for you on the 60-day rollover process. Things happen.

Thanks for the reminder.

AJ
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