Life and Death Planning for Retirement Benefits

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132 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
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?
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.
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 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.