By Ian Berger, JD
IRA Analyst
Question:
I have a client who is still working, over age 75, and wants to roll her 401(k) into her IRA. She has stopped contributing and wants to move the company stock to her brokerage account using the net unrealized appreciation (NUA) strategy. She has been told that the cost basis will be taxed as ordinary income and the appreciation will be taxed at long-term capital gains rates. Someone mentioned that if there are any monies left in the 401(k) account at the end of the year, it could jeopardize the NUA. Is this correct?
Mary
Answer:
Hi Mary,
That is correct. To use the NUA strategy, there must be a triggering event and a lump sum distribution. Turning age 59½ is a triggering event, so your client qualifies there. The lump sum distribution requires that the entire account be distributed in one calendar year – either the calendar year in which the triggering event occurs, or any subsequent calendar year. So, if your client takes a distribution of any of her 401(k) funds this year, she must empty the entire account by December 31, 2026.
Question:
I don’t understand the big deal with qualified charitable distributions (QCDs). If my required minimum distribution (RMD) in one year is $10,000 and I give the $10,000 to a charity as a QCD, I reduce my taxable income by $10,000. Assuming I’m in a 30% tax bracket, I’ve saved $3,000 in taxes.
Alternatively, if I give $10,000 of non-IRA funds to a charity, I get a $10,000 charitable tax (itemized) deduction, and since I’m in the 30% tax bracket, I save $3,000 in taxes. So what’s the difference between the two approaches? They both save me $3,000 in taxes.
Answer:
There are several important differences. Many taxpayers are better off taking the standard deduction instead of itemizing deductions. Those people would get no tax benefit from donating non-IRA funds. In addition, if you are in an RMD year, making a QCD can offset the RMD. This will save you taxes on the RMD. But if you donate non-IRA funds, you will still be stuck with taking a taxable RMD.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/the-net-unrealized-appreciation-strategy-and-qualified-charitable-distributions-todays-slott-report-mailbag/
