ESOP

Submitted by Robert Ervolina on Tue, 2018-06-12 18:44

Hi:

I have a couple questions:

1. Can NUA be applied to company stock in an ESOP? If so, the client has about $6,500 in gain, but from a percentage standpoint the basis is about 41% of the overall value of the account. Basis = $5,589 Acct Value = $13,500. Client is in lower tax bracket. In your opinion, is this even worth doing from an NUA standpoint?

2. My understanding of ESOPs is that after retirement distributions must begin correct? I do not think any exception applies, but funds haven’t been paid out. Plan is held at Vanguard so i’m sure they aren’t making an error. I’m just confused because I thought at retirement payments must begin the plan year following? The only other info. which might be pertinent is statement reads “Employer Contribution Post 1983” for entire amount listed above. Thank you.



Submitted by Alan - IRA critic on Tue, 2018-06-12 19:23

  • A cost basis of 41% is quite high, and NUA would not be beneficial unless client needs the money for expenses within the next year or loss. Otherwise, the ESOP shares should just be rolled over to an IRA. That avoids the immediate tax on the cost basis plus penalty if the client is not 59.5 or separated from service at 55 or later. An IRA rollover would also provide the ability to sell the shares anytime within the IRA without tax due.
  • If NUA is still elected, a qualified lump sum distribution of all similar accounts from the employer must be done. For example, a 401k plan still in place would also have to be distributed (direct rollover to IRA) in the same year as the employer shares were transferred to a taxable brokerage account.  For a qualified LSD, there cannot be any distributions from these plans between the year of the triggering event (usually separation from service) and the year of the LSD. If there has been such distributions reported on a 1099R, then NUA cannot be applied unless a new triggering event occurs.

 

Submitted by Robert Ervolina on Wed, 2018-06-13 16:48

Thank you very helpful. One follow up question, in general from a percentage standpoint in terms of cost basis, what would be a good range to make NUA advantageous, assuming client does not need money immediately?

Submitted by Alan - IRA critic on Wed, 2018-06-13 17:21

It depends on the tax rate paid on the cost basis and whether there will be a penalty, but roughly 25% of the share value would be in the gray area. 

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