[Shadow8IA]

What is the best way to handle ESOP investments when rolling over 401k? We got it them at $19 and they're worth about $140 each. Will capital gains taxes be changing?

[Laurie2]

I cannot be helpful to you from direct personal experience in handling ESOP at retirement, but I found your question interesting so I did a little search. I think offering company stock can be such a good part of a company's business plan. But when a stock is not publicly traded, I assume the rules can be a little different at retirement.

As with any rollover or distribution, the retiree has to be careful in understanding the potential for tax consequences.

I came across the term NUA (Net Unrealized Appreciation) as a factor to consider in tax-treatment of an Employee Stock Ownership Plan. I did not read in detail though about NUA or how it applies.

Please bear with me for a few more sentences while I give you a little unsolicited advice. . .

Find a good tax accountant to help you. At retirement we often are circled by various types of financial "advisors" who want to be ever so helpful with where to put our money. They might even offer tax advice. But if I were you, I would pay a good CPA who should not be trying to sell you anything.

Take this step-by-step and your first step is to understand tax implications.

Before talking to an accountant, I would do some reading on the subject. Reading on the subject can help tremendously in knowing what questions to ask when making this important money-move.

If you are in Florida, there should be plenty of accountants who are quite familiar with ESOP. I am pretty sure that Publix offers ESOP. (When I got to Florida, I noticed that Publix employees overall are usually well-trained and pleasant. Somebody told me they can share in company stock. I then checked to see if Publix was publicly traded. Not.) (sigh) But I digress. . .so anyway. . .

There is a lot of information to be found with a google search. Here's a start:

ESOP Vesting, Distribution, and Diversification Rules

Also, please know that I have absolutely no qualifications to give financial advice. I am just telling you what I would do if I were you.

[rodie]

Originally Posted by Shadow8IA

What is the best way to handle ESOP investments when rolling over 401k? We got it them at $19 and they're worth about $140 each. Will capital gains taxes be changing?

ESOP is a retirement plan similar to a 401k except in an ESOP you as the employee do not contribute. When ESOP is cashed out, the finds can go in to your 401k plan and be deferred. However when the funds do come out of the 401k, they are then taxed as ordinary income.

If funds are not rolled in to a 401k plan and are paid directly to you, then you pay ordinary income tax at that time.

No capital gain treatment as far as I know

[Shadow8IA]

We have an appt with our cpa in Dec but I'm trying to find out what I can so I have a better understanding before we meet with him. At my husbands exit interview we were told there would be capital gains if we cashed it out and I guess there's some concern that capital gains taxes could go up. The company has also sent infor for our cps so he'll have all of the info. I'm just glad the cpa will figure it out!!

[Laurie2]

Originally Posted by Shadow8IA

We have an appt with our cpa in Dec but I'm trying to find out what I can so I have a better understanding before we meet with him. At my husbands exit interview we were told there would be capital gains if we cashed it out and I guess there's some concern that capital gains taxes could go up. The company has also sent infor for our cps so he'll have all of the info. I'm just glad the cpa will figure it out!!

You sound like me. I always have to try to understand what I can before talking to our CPA.

The information I linked in my previous post here is from the National Center for Employee Ownership. There is a short section titled "Taxation of ESOP Distributions." (You might want to print that article and make some notes. I think it could help you with your questions for your CPA.)

I know that a 401(k) or a 403(b) can be rolled over into an IRA. Such a rollover, if done correctly, is without immediate tax consequence. Income taxes are paid upon distribution from the IRA. You decide how much income you will take along the way -- until you reach 70 1/2 when the IRS tells you how much you have to take because the IRS is not about to let us defer income tax forever.

You may also want to consider conversion to Roth as you go along. But that's another topic. At this point, it seems like the main thing to understand is how to do a rollover into a traditional IRA so you can continue to defer taxes. (btw -- Rollovers are termed "distributions" on paper. That word gave me some momentary panic the first time I saw it on the IRA paperwork. I thought somebody had messed up and it meant I had taken the money in-hand and would have to immediately pay income tax on it. But it just meant one plan was distributing to another.)

Publicly traded stocks sold or paying dividends inside a retirement account do not invoke the capital gains tax or dividend tax. It is when those things happen outside of retirement accounts that taxes must be paid.

I have no experience with stocks that are not publicly traded. If the company stock is not publicly traded, my question for the CPA would be -- If a non-publicly traded stock is held inside a company retirement plan, can it be sold while inside that plan and then the cash from the sale rolled directly into an IRA thus avoiding capital gains tax, along with the deferring of ordinary income tax? ( My guess is yes. But find out for sure because I have no credentials, just an interest in these subjects.)

Added note: I think sometimes people get too concerned right away about where to invest cash after it has been rolled over and tucked into an IRA. Even though money-markets are paying zip right now, I think it can be a good idea to park in cash while learning as much as you can about where you want to invest the money. For now, though, it seems like your goal is to get money from Point A to Point B without an immediate tax consequence.

Good luck. Keep reading and asking those informed questions. Never, ever do anything with money that you do not understand. (Our CPA likes my questions and said he wishes more clients were like me. -- But I think that is because a client who understands tax moves makes the CPA look good at tax-time.)