ESOP distribution?
I have a client who is no longer with an employer who offered an ESOP. He is ready to distribute his monies out of this ESOP. Has he already been income taxed on this money or will he be income taxed at time of distribution?
I have a client who is no longer with an employer who offered an ESOP. He is ready to distribute his monies out of this ESOP. Has he already been income taxed on this money or will he be income taxed at time of distribution?
Permalink Submitted by Ken Fitzgerald on Wed, 2007-08-22 21:15
I had ESOP stock from my employer of 25 years, and when the company was sold to a larger fortune 500 company two years ago, my ESOP payout was rolled into an IRA I had opened to receive this payment, with payment made directly to the IRA custodian. In my case, this ESOP stock was tied to a 401k, so the conversion to an IRA was allowed. The stock had been given to me each year and I paid nothing for it, so no tax issues came up. I will be paying taxes as I withdraw it from my IRA. Ken
Permalink Submitted by Alan Spross on Thu, 2007-08-23 00:37
If he takes a distribution instead of doing an IRA rollover, he will be subject to tax on the entire amount.
However, note that ESOP shares are eligible for NUA treatment in most cases as long as a qualified lump sum distribution is taken. Therefore, the first decision may be to get a cost basis quote to see the extent of appreciation of the shares from their purchase date by the ESOP. Even if he sells the shares after distribution, the gain could then be taxed at the much lower LT cap gain rates rather than the entire value as ordinary income.
If he does either a cash out or NUA and is not 59.5 or separated from service at 55, the currently taxable amount is also subject to the early withdrawal penalty. The NUA is NOT subject to early withdrawal. Remember, proper diversification should be considered before tax advantages in arriving at a decision.