From ESOP to IRA?

[Guest daole]

Im yet another newbie so bear with me. My job has been outsourced and as a result I have to deal with the shares from my ESOP. I dont know much but I know that to just cash out would be very expensive. I am 44 and while I have some retirement savings going on (mostly mutual funds) I have not been very directed but I think it might be a good time to get my act together.

I assume that my best move is an IRA? But there is something about this being taxable that I have to take into account but Im not very clear on how but "NUA" keeps popping up -- shares were bought at approx $19 and now are at approx $70. There are not a ton of shares - about 150 I think. Are there particular approaches I should take to minimize the tax impact? Thnks for any advise/patience,

[Kirk Maldonado]

You should have received a document from the plan describing the tax treatment of distributions. You should contact them and ask them to send it to you. It will answer a lot of your questions.

[mbozek]

D: You need to consult with a tax advisor regarding the taxation of the stock to determine which of the two options is the best course of action.

1. Capital gains. Under the tax law the portion of your distribution consisting of stock shares which exceeds the employer's cost (e.g. 70- 19= 51) will be taxed as long term capital gain (either 5 or 15%) in the year the shares are sold. This is called NUA.Your NUA will be $7650 (150x 51). You are not are not required to sell the shares in the year they are distributed to you. In the year of distribution you will be taxed on the the employer basis (19x 150 =2850) as ordinary income if you do not roll over the shares to an IRA and will also be subject to the 10% penalty tax on this cost (285). Any further gain above 70 will be taxed as long or short term capital gain depending on how long the shares are held before they are sold. In addition dividends could be eligible for a reduced tax of 5 or 15%.

2. IRA rollover. If you roll the shares to an IRA there will be no income tax or penalty tax in the year the shares are rolled over. However the proceeds from a sale of the shares or a distribution of the shares from the IRA will be taxed as ordinary income at your marginal tax rate which may be more than 15% as well as the 10% penalty tax if distrbution occurs before 59 1/2. In addition dividends paid into the IRA will be taxed as ordinary income when they are distributed from the IRA.

[Guest Harry O]

I wouldn't bet my retirement savings and rely on the document that your employer will send you regarding the tax treatment of distributions. It is most likely published by the IRS and is not very user friendly.

mbozek described the NUA rules very concisely. I would only add that while rolling over shares to your IRA looks on the surface to be less appealing than taking advantage of NUA, the IRA lets you diversify out of your employer's stock on a tax-deferred basis (no tax on gains realized while shares are held in the IRA) and tax deferral on your basis in the shares and dividends should not be ignored. Generally, if you are going to need to sell the shares and spend the proceeds in the next few years, it makes sense not to rollover. But if you are going to hold the shares as part of your retirement nest egg, an IRA rollover is generally the better choice.

My two cents . . .