When Is NUA Treatment the Best Choice for You?

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, your 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, two other special tax rules (described below) might also apply to your lump-sum payment, potentially making a taxable distribution your best option.

What is the 10-year averaging method?

The 10-year averaging method is a special formula for calculating the federal income tax due on the ordinary income part of a lump-sum distribution from a qualified employer-sponsored retirement plan. You pay this tax only once--the year in which you receive the distribution; it's not paid over the next 10 years.

Essentially, you calculate the tax on one-tenth of the taxable portion of your distribution, using 1986 income tax rates for single filers. You then multiply this tax by 10 to determine the income tax due on your lump-sum distribution.

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