NUA - if client has company stock

Is the cost basis important?

First, it's used to determine how much ordinary income tax a worker would pay if he transferred all or part of his stock into a taxable account.

Second, it's used to determine what the capital gains tax would be once the worker sells the stock.

For instance, if the cost basis is $10,000, the worker would be taxed in the year of distribution at the ordinary income tax rate on that amount. According to Keebler, any appreciation in the securities from the purchase date until the distribution date is known as NUA.
Thus, if a stock is worth $100,000 on the day the worker takes the stock out of the plan, the NUA would be $90,000. Better yet, the worker wouldn't have to pay tax until the stock is sold -- and even better yet, it would be taxed at the capital gains rate. Stock sold within 12 months could result in a combination of long- and short-term capital gains, while stock sold immediately after distribution or after 12 months will have just long-term capital gain. (Of note: workers who have any capital loss carryovers might want to take advantage of any NUA stock they own. Capital losses are fully deductible against capital gains so workers can use the NUA to wipe the slate clean, Cortazzo said.)

In some cases, workers might want to gift their NUA shares to a charity. That way the charity can sell without incurring any tax.
The other important aspect of NUA is this: To use NUA, the distribution must first qualify as a lump-sum distribution. According to Keebler, a lump-sum distribution is simply a distribution of all the assets in a qualified plan within one tax year. To get the special NUA tax treatment, however, one of the following triggering events must occur:
the distribution must be taken from a 401(k) or similar plan;
the entire balance must be paid to the account owner;
the entire distribution must take place within one tax year, by Dec. 31st.

To be sure, there's plenty to consider when it comes to NUA. Workers, for instance, who are under age 55 will have to pay a 10% penalty tax on the cost basis of the distribution. In addition, it's possible that some stock in the 401(k) plan qualifies for NUA and some doesn't, so be sure to separate those two types when transferring assets. According to Cortazzo, one difference between NUA and non-NUA shares is that NUA shares don't get a step-up in basis when inherited, while non-NUA shares do.
Lump-sum or rollover?
So what should workers do? Take the lump-sum distribution or the rollover?
According to Natalie Choate's bible on the subject, "Life and Death Planning for Retirement Benefits," most retiring employees should consider a rollover, the lone exception being when the lump-sum distribution includes appreciated employer stock. If you roll the stock into an IRA, the worker loses any chance to defer taxes on the NUA, plus rolling the stock into an IRA converts an unrealized capital gain into ordinary income.
According to Choate, factors to consider include the following:

How old is the worker? Young workers might want to consider the rollover while older workers might opt for the lump-sum distribution.

What other plans does the participant have? If the worker has plenty of money stashed in other retirement plans, the lump-sum distribution makes sense. But if the worker has just one plan, the rollover makes better sense.

How much of the distribution is NUA? If the NUA is a big portion of the plans' value, the NUA deal is more attractive. If the NUA is a small portion, the rollover is better.

As always, consult with a professional tax advisor or planner about the details.