Five Ways SECURE ACT 2.0 Changes the Required Minimum Distribution Rules

The SECURE 2.0 legislation included in the $1.7 trillion appropriations bill passed late last year builds on changes established by the original Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) enacted in 2019. SECURE 2.0 includes significant changes to the rules that apply to required minimum distributions from IRAs and employer retirement plans. Here’s what you need to know.

What Are Required Minimum Distributions (RMDs)?

Required minimum distributions, sometimes referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer retirement plans after you reach a certain age, or in some cases, retire. You can withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

These lifetime distribution rules apply to traditional IRAs, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, as well as qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer plan, you should consult your plan administrator, a tax professional, or your financial adviser.

Here is a brief overview of the top five ways that the new legislation changes the RMD rules.

1. Applicable Age for RMDs Increased

Prior to passage of the SECURE 1.0 legislation in 2019, RMDs were generally required to start after reaching age 70½. The 2019 legislation changed the required starting age to 72 for those who had not yet reached age 70½ before January 1, 2020.

SECURE 2.0 raises the trigger age for required minimum distributions to age 73 for those who reach age 72 after 2022. It increases the age again, to age 75, starting in 2033. So, here’s when you have to start taking RMDs based on your date of birth:

Date of BirthAge at Which RMDs Must Commence
Before July 1, 194970½
July 1, 1949, through 195072
1951 to 195973
1960 or later175

Your first required minimum distribution is for the year that you reach the age specified in the chart, and generally must be taken by April 1 of the year following the year that you reached that age. Subsequent required distributions must be taken by the end of each calendar year (so if you wait until April 1 of the year after you attain your required beginning age, you’ll have to take two required distributions during that calendar year). If you continue working past your required beginning age, you may delay RMDs from your current employer’s retirement plan until after you retire.

2. RMD Penalty Tax Decreased

The penalty for failing to take a required minimum distribution is steep — historically, a 50% excise tax on the amount by which you fell short of the required distribution amount.

SECURE 2.0 reduces the RMD tax penalty to 25% of the shortfall, effective this year (still steep, but better than 50%).

Also, effective this year, the Act establishes a two-year period to correct a failure to take a timely RMD distribution, with a resulting reduction in the tax penalty to 10%. Basically, if you self-correct the error by withdrawing the required funds and filing a return reflecting the tax during that two-year period, you can qualify for the lower penalty tax rate.

3. Lifetime Required Minimum Distributions from Roth Employer Accounts Eliminated

Roth IRAs have never been subject to lifetime Required Minimum Distributions. That is, a Roth IRA owner does not have to take RMDs from the Roth IRA while he or she is alive. Distributions to beneficiaries are required after the Roth IRA owner’s death, however.

The same has not been true for Roth employer plan accounts, including Roth 401(k) and Roth 403(b) accounts. Plan participants have been required to take minimum distributions from these accounts upon reaching their RMD age or avoid the requirement by rolling over the funds in the Roth employer plan account to a Roth IRA.

Beginning in 2024, the SECURE 2.0 legislation eliminates the lifetime RMD requirements for all Roth employer plan account participants, even those participants who had already commenced lifetime RMDs. Any lifetime RMD from a Roth employer account attributable to 2023, but payable in 2024, is still required.

4. Additional Option for Spouse Beneficiaries of Employer Plans

The SECURE 2.0 legislation provides that, beginning in 2024, when a participant has designated his or her spouse as the sole beneficiary of an employer plan, a special option is available if the participant dies before required minimum distributions have commenced.

This provision will permit a surviving spouse to elect to be treated as the employee, similar to the already existing provision that allows a surviving spouse who is the sole designated beneficiary of an inherited IRA to elect to be treated as the IRA owner. This will generally allow a surviving spouse the option to delay the start of required minimum distributions until the deceased employee would have reached the appropriate RMD age, or until the surviving spouse reaches the appropriate RMD age, whichever is more beneficial. This will also generally allow the surviving spouse to utilize a more favorable RMD life expectancy table to calculate distribution amounts.

5. New Flexibility Regarding Annuity Options

Starting in 2023, the SECURE 2.0 legislation makes specific changes to the required minimum distribution rules that allow for some additional flexibility for annuities held within qualified employer retirement plans and IRAs. Allowable options may include:

  • Annuity payments that increase by a constant percentage, provided certain requirements are met
  • Lump-sum payment options that shorten the annuity payment period
  • Acceleration of annuity payments payable over the ensuing 12 months
  • Payments in the nature of dividends
  • A final payment upon death that does not exceed premiums paid less total distributions made

It is important to understand that purchasing an annuity in an IRA or an employer-sponsored retirement plan provides no additional tax benefits beyond those available through the tax-deferred retirement plan. Qualified annuities are typically purchased with pre-tax money, so withdrawals are fully taxable as ordinary income, and withdrawals prior to age 59½ may be subject to a 10% federal tax penalty.

These are just a few of the many provisions in the SECURE 2.0 legislation. The rules regarding required minimum distributions are complicated. While the changes described here provide significant benefit to individuals, the rules remain difficult to navigate, and you should consult with a tax professional or your financial adviser to discuss your individual situation.


  1. A technical correction is needed to clarify the transition from age 73 to age 75 for purposes of the required minimum distribution rule. As currently written, it is unclear what the correct starting age is for an individual born in 1959 who reaches age 73 in the year 2032.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Types of Investment Accounts for each Stage of Life

By:  Henry VanBuskirk, CFP®, Wealth Manager

Investing is a broad concept that has a wide array of definitions that differ depending on whom you ask.  If you ask a recent college graduate, parents in their early 40s with two young children, and an elderly retired couple to define what investing means to them, you will probably get three wildly different answers. They all have different goals, and their investment accounts need to match those goals. My goal with this article is to help define some of these different investment accounts and why they would be used. There are many different types of investment accounts, and it may be overwhelming to keep tabs on the goals and rules for each account type. While I’m not going to go through every single investment account type in existence, I am going to help define some of the more common and lesser-known investment account types and why they would be used in each stage of life. Let’s start with the recent college graduate.

College graduate:

Say you are a recent college graduate of 24 and you started working for ABC Company. You probably aren’t thinking much about your retirement (…that’s 40 years from now…). You probably are thinking about making sure you can pay rent on time and hoping your date on Friday night goes well. The recent college graduate would probably answer, “I have a 401(k) at work, social security when I’m older, and I’ll be fine. There are a few stocks I like, and I follow the market, but I don’t have enough money to set aside to focus on investing. I don’t need to focus on investing right now.” The sentiment towards investing is understandable, but there are a lot of things that this college graduate can do now. This could be the prime time in this person’s life to start thinking about investing. Assume that ABC Company offers a match of 4%, you make $50,000, your salary never increases, and you contribute 10% to the 401(k).  Below is how much you would have at your projected retirement at age 65 assuming a 7% rate of return.   

Now compare this to someone at ABC Company who is 40 years old, makes $100,000 per year, their salary increases by 5% per year, and contributes 10% to the 401(k) each year. We will use the same 7% rate of return assumption.

The college graduate (24-year-old), who makes half as much as the 40-year-old, would have more saved in retirement. This is due to what Einstein calls “The Eighth Wonder of the World”, compound interest. 

A Traditional 401(k) also would offer tax-deductible contributions that would lower your pre-tax income, would you lower your tax bill, and the investments would grow tax deferred. The catch is that you would be required to take distributions in retirement starting at age 72. This is called the required minimum distribution (RMD). The college graduate is probably not thinking about RMDs right now, but what they are thinking of is getting a break on their taxes and saving for their future retirement. There is also a Roth 401(k)that does not allow for tax-deductible contributions, the earnings would grow tax-deferred, but you would not be required to take any distributions ever (not all plans offer this option).

Now assume that ABC Company offers a High Deductible Health Plan. Since you are a 24-year-old, you probably are in good health and would be okay signing up for a high deductible health plan.  Doing so would give you access to a lesser-known account, a Health Savings Account (HSA). This account type offers the trifecta of tax savings:

  • Tax-deductible contributions
  • Tax-free growth
  • Tax-free distributions when used for qualified health expenses

Think of this account as a Traditional 401(k) where you don’t have required distributions. If you don’t use it for qualified health expenses, then distributions are taxed at ordinary income tax rates. There is also a limit to how much you can contribute to an HSA in any given year (for 2022, $3,650 for individual coverage and $7,300 for family coverage). As we illustrated before, time is your friend when it comes to investing.

Parents in their early 40s with two young children:

Now assume that you are a 43-year-old parent with two young children, ages 5 and 6. You may be thinking about what’s best for your children. Fortunately, there are investment accounts that you can consider for their goals as well. Some investment account types that would fit this bill are Uniform Transfer to Minors Act (UTMA) accounts, Uniform Gift to Minors Act (UGMA) accounts, and Roth IRAs.

Uniform Transfers to Minors Act (UTMA) accounts or Uniform Gifts to Minors Act (UGMA) accounts are accounts where you can set aside money each year to invest for a minor. The adult family member is the custodian (person in charge of the account) and when the child reaches the age of majority (normally 18 but can be as high as 25 in some states), the account legally changes ownership to the child. There are very few differences between a UTMA and a UGMA, which is why I lump them together and will refer to them as a custodial accounts. A custodial account is taxed with the following schedule:

  • The first $1,100 of unearned income is free from tax
  • The next $1,100 is taxed at the minor’s tax rate
  • Earnings above $2,200 are taxed at the parent’s tax rate

It generally would require filing a tax return to report any gains or losses attributed to the investment account’s performance. The taxation in a custodial account is not dependent on whether or not the child or grandchild uses it for qualified education expenses. The UTMA or UGMA account after the child or grandchild reaches the age of majority becomes a non-qualified investment account. This means that it is taxed at the more favorable capital gains tax rates.

One account that can help pay for future college expenses is a 529 plan. 529 Plans (sometimes referred to as college savings plans) are a great investment vehicle if your child goes to college or a private school. This is because the earnings are tax-free, and distributions are tax-free as long as the funds are used for qualified education expenses. The downside is if the distribution is not for qualified education expenses, then the earnings are taxed at ordinary income tax rates and a 10% penalty is assessed. If your child has goals of wanting to be an astronaut, doctor, or another profession that requires post-secondary education, it may be a good opportunity to talk to them about what needs to happen to realize that goal. Maybe during Christmas, you have the child open a letter that has a $100 check made out to a 529 plan. The kid would naturally have questions. You could then give them the same gift every Christmas and show them the 529 plan statement on how you are working together to make that goal a reality.

Another way to save for a minor child would be a Roth IRA. Roth IRAs are available to anyone that has an earned income below $144k for single taxpayers or $214k for married filing jointly. This isn’t just for people 16 and older that work part-time after school. You can have even younger people than that contribute (with the parent’s help as custodian) to a Roth IRA provided that they have earned income.  Earnings on a Roth IRA are tax-free, as long as it has been longer than 5 years since you first contributed to a Roth IRA account, and you have reached age 59.5. There is a 10% early withdrawal penalty if funds are withdrawn before age 59.5 and it is possible that you would owe ordinary income taxes on the earnings received. Your basis in the Roth IRA is never subject to taxation.

For example, I worked with a client who owned an educational toy company, and her 2-year-old was a ‘toy tester’. She gave the 2-year-old a salary, and then matched that salary in the form of a Roth IRA. Think outside the box, but also make sure everything is well documented since you are reporting all of this to the IRS. We are all about tax saving strategies at BFSG, but we will never recommend illegal tax avoidance strategies.

An elderly retired couple:

The elderly couple isn’t thinking about accumulating and is instead thinking about maintaining their lifestyle and passing on their successes to future generations in their household. This is also the time when you are taking required minimum distributions (RMDs) from your Traditional 401(k) or Individual Retirement Account (IRA).

This elderly retired couple has a sizable estate and are concerned about making sure their grandchildren can attend college. They can put the RMD funds (net of taxes) into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses. With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits.  

What some of our clients do when they don’t need the money from their RMDs (not a bad problem to have) is that they journal the net distribution from their Traditional 401(k) or IRA to their brokerage investment account.  The brokerage investment account is non-qualified (no favorable tax treatment) that can be used for any purpose.

However, don’t let Lloyd Christmas have that chance at your estate. Make sure the brokerage investment account is titled properly – preferably in the name of your Living Trust.

Upon the elderly retired couples passing, the brokerage investment account would pass to their heirs (as dictated in the Trust), and they would receive a step-up in cost basis at death. For example, assume you put $100,000 into a brokerage investment account and it grows to $150,000 10 years later. If you close out the brokerage investment account, you would owe long-term capital gains taxes on the $50,000 gain and you would receive $150,000 minus what was paid in long-term capital gains taxes. If you instead leave the account open and pass away with the $150,000 brokerage investment account, your heirs would receive the account and can choose to take the $150,000 tax-free.


Regardless of what demographic group you are a part of, there are investment accounts for you and a team of CERTIFIED FINANCIAL PLANNERSTM at BFSG that can help you along your life journey.  Let us know what we can do to help. 



Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The Best Strategies for your Required Minimum Distributions

By:  Henry VanBuskirk, CFP®, Wealth Manager

The current rule states that you must take your first Required Minimum Distribution (RMD) by April 1st of the year after you reach 72 and annually thereafter by December 31st of each year. When the SECURE Act became law on December 20, 2019, the RMD age was pushed back from age 70.5 to age 72. 

Plans affected by RMD rules are: 401(k) plans, 403(b) Plans, 457 Plans, Traditional IRAs, SEP IRAs, SIMPLE IRAs, Inherited IRAs and Inherited Roth IRAs. Defined Benefit and Cash Balance plans satisfy their RMDs by starting monthly benefit payments (or a lump sum distribution) at the participant’s required beginning date.

If you’re still employed by the plan sponsor of a 401(k) and are not considered to be a more than 5% owner, your plan may allow you to delay RMDs until you retire. The delay in starting RMDs does not extend to owners of traditional IRAs, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and SARSEP IRA plans.

The RMD value is calculated based on the qualified investment account’s value on December 31st of the prior year and is based on standardized IRS guidelines (i.e., the RMD for 2022 is based on the value of the account on 12/31/2021). The prior year’s year-end balance is divided by a life expectancy factor issued by the IRS.

 If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).

For inherited IRAs and inherited Roth IRAs, if the account was inherited before the SECURE Act was passed, you can take RMDs over your life expectancy. If you inherited the account after the SECURE Act was passed, there are no required annual distributions, but the account must be depleted within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child until they reach the age of majority. 

Now let’s take a look at the options available to you for your IRA, 401(k), or another qualified investment account subject to RMD rules.

Option 1 – Take your RMD.

This is the most straightforward option. You can take your RMD (or a greater amount if needed), withhold the appropriate federal and state taxes from the distribution, and use the net distribution as needed. If this is your first year taking your RMD, you can take two RMDs in the first required year. This is because the rules say by April 1st following the year you turn 72. Therefore, you could take your 2022 RMD on February 15, 2023, and your 2023 RMD on June 30, 2023. Doing this would allow you to delay the first year’s RMD for tax purposes for only the first year and means that the 2022 RMD wouldn’t affect your 2022 tax return. However, Uncle Sam will eventually get his recompense and your 2023 tax return would reflect your 2022 RMD and 2023 RMD with this strategy. Note that RMDs are taxed at ordinary income rates.

Option 2 – Don’t take your RMD.

Please don’t go with this option. The IRS has a very steep penalty for those who don’t take their RMD.  The IRS penalty is 50% of the amount not taken on time.  In general, even if you don’t need the money.  You really should take it.  As you will see later, there are many options available to you even if you don’t need the money.

Option 3 – Take your RMD and invest those proceeds into a non-qualified investment account.

With this option, you would take the RMD as normal and withhold federal and state taxes and invest the net distribution into a non-qualified (taxable) investment account. The non-qualified account could be used for general savings to be used during your lifetime, an inheritance to gift to your beneficiaries after your death, or to help save for a future unexpected expense like a long-term care need.

Option 4 – Qualified Longevity Annuity Contract (QLAC).

A QLAC is a strategy where you put in the lesser of 25% of the total value of all your qualified investment accounts or $145,000. A QLAC allows you to fund an annuity contract as early as age 65 and delay income received from the annuity until age 85. The QLAC itself does not count towards the RMD calculation, but the income received from QLAC is treated as ordinary income. This sounds like the slam dunk option, right? Wrong. The answer is it depends on your unique situation (like most answers in financial planning). Yes, a QLAC would help lower the tax bill during the years you defer taking income from the QLAC, at the cost of less net money in your pocket during the early years of your retirement and annuity payments that do not generally have a cost-of-living adjustment tied to them that would increase your tax bill because you still have RMDs on top of the QLAC payments. A QLAC is generally also an irrevocable decision. We would be happy to discuss the pros and cons of purchasing a QLAC if you have further questions.

Option 5 – Qualified Charitable Distribution (QCD).

For the altruist (who also likes not paying taxes), a QCD is an option. If there is a charity (a 501(c)(3) organization) that you feel passionate about, you can donate up to $100,000 per year (as of tax year 2022) directly from your qualified investment account to that charity tax-free. This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns. The key word is “directly”, as if you physically take the RMD check and then turn around and write a check to that charity, that does not count. For those over age 70.5, QCDs can be used before you are required to take your RMD at age 72. We can work with you to make sure that your QCD is done correctly.

Option 6 – College Planning.

Maybe you have a sizable estate and are concerned about making sure your grandchildren can attend college. With this option, you can put the net RMD funds into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses (i.e., tuition, books, room and board, etc.). Contributions to this investment account may even be tax-deductible in your state. Also, since this is considered a gift, you are lowering the size of your taxable estate, which could help your heirs at the time of your passing. Normally you are only allowed to gift $16,000 per year (or $32,000 per year if you elect gift splitting with your spouse) per beneficiary. But with a 529 plan, you can gift 5 years’ worth of gifts in only one year (“superfunding”).  This means that you could potentially gift $80,000 per beneficiary for a single tax filer or $160,000 per beneficiary for a married couple into the 529 plan and lower your taxable estate by that amount. There are a few moving parts in this example, including possibly filing a gift tax return, so we would need to work with you and possibly your accountant and estate planning attorney to make sure this would all go according to plan.

Now that we have an idea of the different options available to you, we would like to illustrate examples of how some of these options can be used in a real-world setting.

*If you have a QLAC, the calculations could differ, but the general idea of the flowchart would still be the same. 

The goal of this article was to illustrate that there are many different options available to you (including ones not illustrated in this article). Also, check out this 2-minute BFSG Short which gives a high-level overview of the most important things to know about RMDs. Our team is available to discuss these concepts with you in further depth if you have any other questions and to evaluate what option would be best for your unique situation.  

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Upcoming Webinar (July 26th): Retirement Plan Basics

Learn how to prepare for retirement by learning the basics of your retirement plan. Why save in your retirement plan? How to invest in your retirement plan? What to do with your retirement plan after you retire? Get these questions answered and more.

Come join the conversation with Tina Schackman, CFA®, CFP® and Keith Johnson, CFP® of BFSG.

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Net Unrealized Appreciation: The Untold Story

If you participate in a 401(k), employee stock ownership plan, or other qualified retirement plan that lets you invest in your employer’s stock, you need to know about net unrealized appreciation — a simple tax-deferral opportunity with an unfortunately complicated name.

When you receive a distribution from your employer’s retirement plan, the distribution is generally taxable to you at ordinary income tax rates. A common way of avoiding immediate taxation is to make a tax-free rollover to a traditional IRA. However, when you ultimately receive distributions from the IRA, they’ll also be taxed at ordinary income tax rates (special rules apply to Roth and other after-tax contributions that are generally tax-free when distributed).

But if your distribution includes employer stock (or other employer securities), you may have another option — you may be able to defer paying tax on the portion of your distribution that represents net unrealized appreciation (NUA). You won’t be taxed on the NUA until you sell the stock. What’s more, the NUA will be taxed at long-term capital gains rates — typically much lower than ordinary income tax rates. This strategy can often result in significant tax savings.

What is Net Unrealized Appreciation?

A distribution of employer stock consists of two parts: (1) the cost basis (that is, the value of the stock when it was contributed to, or purchased by, your plan) and (2) any increase in value over the cost basis until the date the stock is distributed to you. This increase in value over basis, fixed at the time the stock is distributed in-kind to you, is the NUA.

For example, assume you retire and receive a distribution of employer stock worth $500,000 from your 401(k) plan, and that the cost basis in the stock is $50,000. The $450,000 gain is NUA.

How Does it Work?

At the time you receive a lump-sum distribution that includes employer stock, you’ll pay ordinary income tax only on the cost basis in the employer securities. You won’t pay any tax on the NUA until you sell the securities. At that time the NUA is taxed at long-term capital gain rates, no matter how long you’ve held the securities outside of the plan (even if only for a single day). Any appreciation at the time of sale in excess of your NUA is taxed as either short-term or long-term capital gain, depending on how long you’ve held the stock outside the plan.

Using the example above, you would pay ordinary income tax on $50,000, the cost basis, when you receive your distribution (you may also be subject to a 10% early-distribution penalty if you’re not age 55 or totally disabled). Let’s say you sell the stock after 10 years, when it’s worth $750,000. At that time, you’ll pay long-term capital gains tax on your NUA ($450,000). You’ll also pay long-term capital gains tax on the additional appreciation ($250,000), since you held the stock for more than one year. Note that since you’ve already paid tax on the $50,000 cost basis, you won’t pay tax on that amount again when you sell the stock.

If your distribution includes cash in addition to the stock, you can either roll the cash over to an IRA or take it as a taxable distribution. And you don’t have to use the NUA strategy for all of your employer stock — you can roll a portion over to an IRA and apply NUA tax treatment to the rest.

What is a Lump-Sum Distribution?

In general, you’re allowed to use these favorable NUA tax rules only if you receive the employer securities as part of a lump-sum distribution. To qualify as a lump-sum distribution, both of the following conditions must be satisfied:

  • It must be a distribution of your entire balance, within a single tax year, from all of your employer’s qualified plans of the same type (that is, all pension plans, all profit-sharing plans, or all stock bonus plans); and
  • The distribution must be paid after you reach age 59½, or as a result of your separation from service, or after your death

There is one exception: Even if your distribution doesn’t qualify as a lump-sum distribution, any securities distributed from the plan that were purchased with your after-tax (non-Roth) contributions will be eligible for NUA tax treatment.

NUA Works for your Beneficiaries

If you die while you still hold employer securities in your retirement plan, your plan beneficiary can also use the NUA tax strategy if he or she receives a lump-sum distribution from the plan. The taxation is generally the same as if you had received the distribution (the stock doesn’t receive a step-up in basis, even though your beneficiary receives it as a result of your death).

If you’ve already received a distribution of employer stock, elected NUA tax treatment, and die before you sell the stock, your heir will have to pay long-term capital gains tax on the NUA when he or she sells the stock. However, any appreciation as of the date of your death in excess of NUA will forever escape taxation because, in this case, the stock will receive a step-up in basis. Using our example, if you die when your employer stock is worth $750,000, your heir will receive a step-up in basis for the $250,000 appreciation in excess of NUA at the time of your death. If your heir later sells the stock for $900,000, he or she will pay long-term capital gains tax on the $450,000 of NUA, as well as capital gains tax on any appreciation since your death ($150,000). The $250,000 of appreciation in excess of NUA as of your date of death will be tax-free.

Some Additional Considerations

  • If you want to take advantage of NUA treatment, make sure you don’t roll the stock over to an IRA. That will be irrevocable, and you’ll forever lose the NUA tax opportunity.
  • You can elect not to use the NUA option. In this case, the NUA will be subject to ordinary income tax (and a potential 10% early-distribution penalty) at the time you receive the distribution.
  • Stock held in an IRA, or an employer plan is entitled to significant protection from your creditors. You’ll lose that protection if you hold the stock in a taxable brokerage account.
  • Holding a significant amount of employer stock may not be appropriate for everyone. In some cases, it may make sense to diversify your investments.*
  • Be sure to consider the impact of any applicable state tax laws.

When is it the Best Choice?

In general, the NUA strategy makes the most sense for individuals who have a large amount of NUA and a relatively small cost basis. However, whether it’s right for you depends on many variables, including your age, estate planning goals, and anticipated tax rates. In some cases, rolling your distribution over to an IRA may be the better choice. And if you were born before 1936, other special tax rules might apply, making a taxable distribution your best option.

If you’re expecting a distribution of employer securities from a qualified retirement plan, make sure you speak with your financial professional at BFSG or tax professional before you take any action so that you can fully explore and understand all the options available to you. Only then can you be assured of making the decision that best meets your individual tax and non-tax goals.

*Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

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