L1: ESOP TerminationMy company is terminating our ESOP Plan. I want to keep the stock so I have 2 options, put the stock into a brokerage account or roll it over into an IRA. My company is saying I am not eligible for NUA tax savings because I’m not 59 1/2. Is this correct?2017-07-13 03:10, By: whitelg, IP: [18.104.22.168]
L2: ESOP TerminationNo. The 59 1/2 refers only to the fact that if you are under 59 1/2, you are subject to the 10% penalty, in addition to the tax at regular rates ON THE COST BASIS ONLY, not on the full value.
Get the NUA figure from your company, and see what that figure is, and how much the stock is now worth. Your tax professional can then determine the total tax bite. If the cost is low, then it may be a good strategy. If the cost basis is high, and therefore the appreciation is low, then it probably isn’t a good idea.
The biggest advantage of the NUA approach is that future sales will be taxed at the special long-term capital gains rates (usually 15% unless you are in a high tax bracket), even if you were to sell the NUA stock the next day !!! ( Of course, if you go the NUA route, you must transfer the shares to a brokerage non-retirement account, not to an IRA.)
JK Lasser “Your Income Tax” has an excellent 2-page narrative about NUA. Many brokers have good explanations also, or google it.2017-07-13 06:02, By: dlzallestaxes, IP: [22.214.171.124]
L3: ESOP TerminationIf you are still employed, that may explain the company’s statement regarding age 59.5. In order to utilize NUA, you must complete a lump sum distribution of all similar plans following a “triggering event”. Two of those events are reaching 59.5 and separation from service. Therefore, if you are still working you would have to wait until 59.5.
But in addition to reaching 59.5 you also must do a lump sum distribution of all similar plans. An ESOP and a 401k are both considered profit sharing plans, so if you reach 59.5 and are participating in a 401k plan, even though the ESOP is terminated you cannot do a qualified LSD for NUA purposes if you are still an active 401k participant. A DB pension is NOT considered a profit sharing plan so you could still participate in a DB plan without affecting an LSD at 59.5.
In summary, this can be complex depending on which plans the company offers and which ones you are considered as a participant. Separation from service is a much simpler triggering event with respect to doing a qualified LSD.2017-07-13 16:22, By: Alan S, IP: [126.96.36.199]
L4: ESOP TerminationIf you are in fact “separating from service”, then you should ask the company if you can continue in the 401-K plan, which could allow you to take distributions in the year you reached or later (or at any time during the year you will reach 55), without being subject to the 10% early distribution penalty before 59 1/2.
As Alan stated, this is a very complex area, and should be approached with professional advice because of the various nuances.2017-07-13 17:05, By: dlzallestaxes, IP: [188.8.131.52]
L2: ESOP TerminationI am still employed by the company and I have assets in another one of their 401k plans.
I have contacted several financial advisors and tax accountants and keep getting different answers.
The FMV of the stock is worth many times more than the cost basis so I’m disappointed I can’t use the NUA and transfer the stock into a brokerage account. The difference I’ll end up paying in taxes is almost worth quitting over. It seems like since the company is forcing me out before I quit and I can’t move the stock into the other 401k plan, it should be considered a triggering event.
2017-07-13 19:09, By: whitelg, IP: [184.108.40.206]
L3: ESOP TerminationThinking outside the box :
Could you quit this year (maybe in Nov or Dec), do an NUA lump sum distribution, and then either become an independent consultant for them (possibly by setting up your own company with its own solo 401-K that you roll their 401-K into), or be rehired next year ?
BTW, does their 401-K also have company stock, possibly from their matching contribution ?
Alan can probably answer this better than me.2017-07-13 19:20, By: dlzallestaxes, IP: [220.127.116.11]
L4: ESOP TerminationNo reason you could not work out a termination/rehire or independent contractor arrangement, but the employer may not be interested.
With your ESOP, apparently the shares are not being put back to the employer or plan since you can roll them to an IRA. Therefore the shares will continue to exist, so it would be interesting to ask the employer why the ESOP shares could not be transferred into the 401k where their cost basis could continue to be tracked. Then you could tap NUA when you separated from service. This happens with many terminated ESOP plans. Perhaps they do not want to incur the costs for that option.2017-07-14 01:58, By: Alan S, IP: [18.104.22.168]