Case of the Week: Can NUA in Employer Stock Count Towards Satisfying an RMD?

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. Responding to a question from an advisor in Colorado, the ERISA consultants at the Learning Center Resource Desk addressed a common inquiry involving net unrealized appreciation (NUA) and required minimum distributions (RMDs). The advisor asked:

“Can the portion of a distribution from a 401(k) plan that takes advantage of NUA tax treatment be used to satisfy the receiving participant’s RMD for the year?”

Highlights of Discussion

  • Yes — amounts excluded from income at the point of distribution, such as NUA on employer securities, are amounts a plan participant may count toward satisfying an RMD under Internal Revenue Code Section (IRC §) 401(a)(9). (NUA is eventually included in the participant’s income as taxable long-term capital gains when the employer securities are eventually sold.)
  • According to Reg. 1.401(a)(9)-5, Q&A 9, with a few, limited exceptions, all amounts distributed from a qualified plan are amounts that are taken into account in determining whether an RMD is satisfied for a participant, regardless of whether the amount is includible in income.
  • For example, amounts that are excluded from income as recovery of “investment in the contract under IRC§ 72” (i.e., after-tax contributions) are taken into account for purposes of determining whether an RMD is satisfied for a year. Similarly, amounts excluded from income as NUA on employer securities are counted towards satisfying an RMD of the participant.
  • The following amounts are not taken into account in determining whether a participant’s RMD is satisfied for the year:
    • Amounts returned to a participant to correct plan excesses;
    • Loans treated as deemed distributions;
    • The cost of life insurance coverage (i.e., PS 58 costs);
    • Dividends on employer securities; and
    • Other similar amounts as deemed by the IRS and published in the Internal Revenue Bulletin from time to time.

Conclusion

The IRS is clear that NUA on employer securities is a distribution amount that a plan participant may count toward satisfying his or her RMD for the year.

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“Case of the Week” is the winner of an APEX Award for Publication Excellence for 2017.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017, Columbia Management Investment Advisers, LLC. Used with permission.

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