By Ian Berger, JD
IRA Analyst

Question:

Hello,

I’ve run into someone who is retired, age 77, and therefore taking required minimum distributions (RMDs) from his Caterpillar 401(k) plan. He has approximately $5M in Caterpillar stock within the plan. It seems murky as to whether he would be eligible for the net unrealized appreciation (NUA) strategy. I have seen that taking RMDs will likely prevent eligibility for NUA treatment due to the lack of distribution of the entire balance in one taxable year. Any thoughts?

Thanks,

Derek

Answer:

Hi Derek,

Eligibility for the NUA strategy requires a triggering event and a lump sum distribution. A lump sum distribution means that the entire 401(k) account balance must be emptied all in one calendar year. The calendar year must be the same year in which the triggering event occurs or a later calendar year. After hitting a trigger, certain distributions (such as taking an RMD) require the entire remaining account balance to also be taken that same year, or else the trigger is lost and the NUA treatment is no longer available.

This person had a triggering event when he retired, so, if he started RMDs before 2026, then he would have needed to complete the lump sum distribution in that first RMD year. Failing to do that means the NUA strategy cannot be used.

Question:

Can a person, age 73, who is now required to take a traditional IRA RMD, still contribute to a Roth IRA if he is still working and has earned income?

Thank you,

Michael

Answer:

Hi Michael,

Yes, someone can make a Roth IRA contribution as long as he (or, if married, his spouse) has earned income at least as high as the contribution, and he meets the Roth IRA income limits. Taking RMDs from the traditional IRA does not affect eligibility for the Roth IRA contribution. However, the RMDs cannot count as earned income for Roth IRA contribution purposes.

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