Question

Your client, Rick House, is retiring later this year. He has been a participant in a profit sharing plan through his employer. There is substantial appreciation of the employer securities within his profit sharing plan account. In order to avoid current taxation on a distribution, Rick decided to roll over the entire account balance to an IRA. Upon a distribution from the IRA, the gain from the shares is

eligible for NUA treatment and is taxed as a long-term capital gain.

eligible for NUA treatment and is taxed as ordinary income.

not eligible for NUA treatment and is taxed as long-term capital gain.

not eligible for NUA treatment and is taxed as ordinary income.

Answer 1

Not eligible for NUA treatment and is taxed as ordinary income. (which is Option D)

_____

Explanation:

As per the applicable rules, an individual may rollover the balance in a profit sharing plan account to an IRA. Such a step would enable him/her to save or defer taxes. However, such a transfer will not be eligible for NUA treatment. Additionally distributions from IRA are subject to ordinary income tax rates and not capital gain tax rate. In the given case, Rick has decided to roll over the entire account balance to an IRA. As such, the distributions from IRA will not qualify for NUA treatment and will get taxed as ordinary income. Therefore, Option D is correct.