Transferring ESOP Roth 401K to Roth IRA | Ed Slott and Company, LLC

Transferring ESOP Roth 401K to Roth IRA

Can you recommend the best way to transfer my Employee Stock Ownership Plan (ESOP) Roth 401K to a Roth IRA, i.e., without it being taxable or any other negative implications?

ESOP shares are pre tax, not Roth. You could roll the ESOP plan (if eligible and the plan allows) to your Roth IRA, but you would owe taxes on the value of the shares. If you have a Roth 401k balance, you probably also have a pre tax 401k balance because all matching contributions are pre tax and do not go into the Roth 401k. Finally, you may benefit from NUA if the ESOP shares have appreciated a large amount. In such a situation, you would have to receive a distribution into a taxable brokerage of the shares as you cannot use NUA with shares that are rolled into an IRA. The balance already in your Roth 401k should be directly rolled into your Roth IRA. You need to find out how your plan is structured in order to determine your options, then choose the best combination. If NUA is involved, that makes the choices much more complex, so the first step is to determine what the cost basis is for the ESOP shares. If it is 25% of the current value or less than 25%, NUA should be considered. If you choose to not pursue NUA, then you need to decide if it is wise to roll pre tax ESOP or any pre tax 401k balance into your Roth IRA, as you will owe tax on such a rollover. Rolling your Roth 401k balance to your Roth IRA will not be taxable.

 

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