As a wealth manager specializing in helping employee-owners prepare for retirement, I regularly have individuals attending my webinars because they need clarity on how ESOP distribution happens. Their primary question that leads them to me is:
I have an ESOP at work. How and when do I get paid?
Individuals that spend a lifetime working for an ESOP company want to prepare 5 to 10 years before retirement, so they begin taking steps towards truly understanding what diversification and distribution of their ESOP share will look like for them.
If you are in the same boat, you’ve found yourself in the right place to begin finding your answers.
When will I be paid?
Most employees who participate in an ESOP are eligible to get paid for their stock at age 55 and age 60 and then over a 5 year period for remaining share value when they retire. Employees receive a statement showing how much they can withdraw and a form to indicate whether to receive a check or rollover the funds to an IRA or their 401k.
What happens to my ESOP benefits if my company is purchased by another company?
When a company is owned by its employees and sold to another company, in most cases, the employees will receive a lump sum payment equal to the value of their ESOP shares. This windfall can be a life changing amount of money for some folks. If you receive $500,000, $1 million, or $3 million you may want to speak with a trusted financial advisor to receive help with investing that money for your future. The decisions you make can be life changing.
If your company is sold and you do not receive a lump sum payment for your shares, there are two options. Your ESOP shares may be rolled over into your 401k at the acquiring company, or into new ESOP shares for you at the acquiring company.
Who buys my ESOP shares?
The company you work for repurchases the shares from the ESOP plan. Once those shares are repurchased you can reinvest the cash received in an individual retirement account (IRA) or 401k. Or, you can pay taxes (and penalties) to spend the cash immediately.
What happens to my ESOP when I retire?
ESOP plans are required to allow employees to retire at age 65, but some allow for earlier retirement. At the time an employee declares his or her retirement, most ESOPs distribute the cash value of employee shares in substantially equal installments across five years beginning the year following your retirement date. That cash value can be spent after paying taxes, or rolled over into an IRA (individual retirement account) to invest in mutual funds or ETFs to provide a lifetime of income withdrawals.
Can I access my ESOP before retirement?
Most ESOP plans offer employees the ability to sell back a portion of their shares to the company at milestone ages such as 55 or 60. This allows the employee to rollover some of their company stock in the ESOP to a more diversified individual retirement account with mutual funds or ETFs. Or, the employee can cash the check and spend the money after paying any taxes or penalties due on the sale of company stock.
What if I quit or am terminated?
Depending on the ESOP plan document, you may be able to request payment for your ESOP shares all at once or across time depending on your plan’s governing documents. Consult with your human resources department.
What are the benefits of reinvesting my ESOP cash distribution into an IRA or 401k?
Your retirement nest egg will continue to grow when properly invested. You can spread your tax obligation to the IRS across time. If properly managed, your IRA investments can provide you with a lifetime of sustainable income.
What are the benefits of spending my ESOP cash distribution immediately?
You can use the money for any purpose after you pay taxes. Some examples are buying a home, paying off a mortgage, funding your children’s college, or purchasing a new vehicle. You may want to consider whether these expenses outweigh the benefit of reinvesting the cash distribution into your retirement nest egg.
Are you comfortable with your progress towards retirement? Are you confident you’ll know how to handle your ESOP diversification and distribution when the time comes? Do you need help visualizing how your ESOP can contribute to your retirement?
Peak Wealth Planning meets with clients in Champaign and Chicago, Illinois, as well as in Colorado near Denver, Winter Park, and Fraser.
If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.