Age 70 1/2

[Guest Jan L]

Is it allowable for an ESOP participant at age 70 1/2 to rollover their full ESOP distribution or a ESOP RMD to their personal IRA account? Thanks.

[ETA Consulting LLC]

Not an RMD.

The issue, however, is that if the participant is still employed, then no part of the distribution may be "an RMD" unless the participant is a 5% owner.

Fact patterns are important.

Good Luck!

[Guest Jan L]

Not an RMD.

The issue, however, is that if the participant is still employed, then no part of the distribution may be "an RMD" unless the participant is a 5% owner.

Fact patterns are important.

Good Luck!

Thanks, Participant is not employed and not a 5% owner. I did not think it was rollable, but had to ask for confirmation as I these so infrequently.

[mbozek]

Is it allowable for an ESOP participant at age 70 1/2 to rollover their full ESOP distribution or a ESOP RMD to their personal IRA account? Thanks.

If the participant is not working in the year they turn 70 1/2 then an MRD will be required. The balance of the account must be be rolled over by Dec 31 to avoid having to take another MRD in 2012.

Q if the employee is eligble to receive employer stock as a distribution why not elect to receive the stock as a lump sum distribution and elect to have the gains which exceed contributions taxed under the rules for NUA, i.e., 15% captial gains rate instead of ordinary income tax?

[GMK]

I agree that participants should always consider the option of a lump sum distribution with NUA taxation.

You should not be disappointed, however, if NUA turns out to be less attractive than it first seems. Running the numbers generally shows that NUA is not the better choice unless the basis is a small percentage of the balance or if you will be in a high tax bracket forever or if you need the cash now and would take a lump sum distribution regardless of NUA.

You pay taxes on the entire distribution amount, not just the NUA. The basis is taxed as ordinary income (which can put some people in a higher tax bracket), and the NUA is taxed at capital gains rates. Whatever you pay now in taxes is no longer available for investment, so the remainder available for generating future earnings is less than with a lump sum rollover. NUA may still be a good option, depending on your financial situation, but you have to look at the specifics of your own personal circumstances.

If the company is an S corp, basis will be more than simply the value of the shares when the ESOP acquired them. Certain earnings of an S corp are passed through to the shareholders. The ESOP doesn't pay taxes on these pass through earnings, but the earnings are added to the basis of the shares in the ESOP. In some cases, this can result in little or no NUA in the ESOP shares. Be sure to ask the plan administrator how much NUA would be in your distribution before requesting a lump sum payment to you.

[mbozek]

GMK:

The capital gains tax is only paid when the employer stock is sold, not in the year of distribution. Also CG tax can be reduced by the amount of carry over capital losses.

If the employee holds the stock until death the heirs will get a stepped up basis on the stock which eliminates CG tax.

Many privately held companies require that the stock be tendered back to the company when the employee retires or separates from service.

[GMK]

Good points. Thanks.

I agree that NUA tax treatment could be the winner for those who are allowed to hang on to the stock into retirement and who can afford to do so.

We require immediate sale of the distributed stock back to the company, and that takes away the significant longer term advantages of NUA treatment that you described.