Hello and thank you in advance for your help. I appreciate the information you regularly provide to readers. I would like some clarity in regards to NUA.
Suppose Betty has a 401(k) balance with $500k in company stock (basis $100k) and $700k of assorted mutual funds. Betty quits her job on November 15, 2016. We have a qualifying event that gives the client the option to do NUA. Furthermore, Betty dies on December 1 of the same year (she turned 70 1/2 in April so she must take an RMD in 2016). Her designated non-spousal beneficiary is Jack. He is 30 years old.
I know that NUA passes to Jack as the designated beneficiary. I also know in order to do NUA Jack must (1) rollover the mutual funds to an Inherited IRA and (2) subsequently transfer company stock to a non-retirement account. Does Jack have to do both by the end of 2016, because both have to take place in the same tax year as the qualifying event?
You mentioned previously that no funds can be rolled over between both qualifying events. For example, if Betty took an RMD after quitting, but before (1) and (2) as listed above, Betty would negate NUA as I understand. Why does this negate NUA? What rule does this break?
Please confirm that the withdrawal/rollover/transfer that occurs prior to the qualifying event has no impact on the ability to do NUA. Thank you.
It does not matter if Betty took any distributions from the 401(k) because her death is a new triggering event for NUA purposes. The beneficiary has a clean slate and can do the NUA as part of his lump-sum distribution of the plan assets. The lump-sum distribution does not have to occur in the same year as the triggering event. It can occur in any later year, as long as no distributions were made from the plan in the meantime. However; since this is a beneficiary doing NUA, the lump-sum distribution needs to be completed by the end of the year after Betty’s death in order for the beneficiary to qualify for the stretch options available in an inherited IRA holding the non-NUA assets.
I have a client with a date of birth of 10/1/47. Therefore, she will be 70 ½ on April 1, 2018. Is her initial required RMD on this date or one year later?
Thanks for your guidance.
The required beginning date rule gives a lot of people trouble. The rule is that the required beginning date (RBD) is April 1st the year after the year you reach age 70 ½. Your client has until April 1, 2019 to take her first RMD since that is the year after she turns 70 ½. If she waits until 2019 to take her 2018 RMD, she will also have to take her 2019 RMD by the end of 2019. For most IRA owners, it does not make sense to double up on distributions.