Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

2.5.05 Election to include NUA in income The recipient can elect out of the favorable tax treatment, i.e., can elect to have the NUA taxed as income when the distribution is received rather than deferring tax until the stock is sold. This option could be attractive if (i) the distribution qualifies for special averaging (see ¶ 2.4.06 ) and (ii) the total distribution is small enough that the tax under the special averaging method is less than the capital gain tax that will otherwise eventually have to be paid. Of course this decision is based on some guesswork, since it involves comparing today’s special averaging rate with tomorrow’s capital gain rate. 2.5.06 Should employee keep the LSD or roll it over? Frank Duke, CPA, of Cincinnati, OH, recommends that the employee consider rolling over stock equal in value to the plan’s “basis,” and not rolling stock equal in value to the NUA. Using the basis allocation method blessed by the IRS in PLR 8538062 (see ¶ 2.5.07 (B)), such a partial rollover potentially maximizes the tax benefits to the employee, who can realize long-term capital gain on the NUA portion whenever he decides to sell the nonrolled stock, while deferring income tax on the ordinary income portion that is rolled over until he later takes a distribution from the IRA. Bob Keebler, CPA, of Green Bay, WI, and his colleagues at Keebler & Associates, do extensive work with NUA-holding employees and retirees. PLR 2002- 15032, involving gifting NUA stock to a charitable remainder trust, is an example of their creative planning. Much of Bob’s work involves computer modeling and hedging strategies to help clients maintain their employer stock (and favorable NUA treatment) while managing the risk of a one-stock portfolio. NUA: Expert Tips When first advising an employee who holds NUA stock in his retirement plan, consider consulting with a more experienced practitioner. Advisors who counsel numerous NUA stock-holding retirees often know more about the subject than the plan’s own counsel and/or an auditing IRS agent. Here are some tips and war stories from three advisors who have counseled numerous employees regarding the best disposition of their NUA stock: Mark Cortazzo, CFP, Senior Partner of MACRO Consulting Group, Parsippany, NJ, reports that each employer has its own method of calculating the “basis” of the NUA stock; the employee may be able to take advantage of his particular employer’s variation to increase his NUA benefit prior to retiring. He also points out that the plan’s basis may be different for different shares of employer stock held in the employee’s account, and that the employee is entitled (under IRS rules) to take advantage of this (for example, by specifying which particular shares will be rolled to an IRA and which will be distributed to the employee). However, the plan’s reporting to the IRS (on Form 1099-R) will not differentiate; the plan may even insist on using average basis for all the stock. So the employee may need to negotiate with the company. Mark also has found shocking mistakes by employers, such as reporting multi-year distributions as being entitled to NUA treatment even though they clearly don’t qualify.