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Megan C
Megan C , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16539
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I am 36, have about $31K coming to me from ESOP, and trying

Resolved Question:

I am 36, have about $31K coming to me from ESOP, and trying to decide on if I should cash out fully and pay taxes and penalties; if I should rollover into a Roth IRA and pay taxes on it now; or if I should rollover to a Traditional IRA. I don't necessarily need the cash now or anytime soon, and don't really know what my tax bracket will be like when I retire (at some point). Any suggestions? I don't know if there's a basis of my stock ownership, meaning what it was bought at and capital gains and such, but I could find out if I know what question to ask. I do know that I received ALL of that stock when the company was doing really well, and then now its just slightly average and trying to make its way back up. I want to say at one point before I left, my ownership was worth about $80K, and now its down to $31K.
Submitted: 2 years ago.
Category: Finance
Expert:  Megan C replied 2 years ago.

Megan C :

Thank you for your question, and thanks for using JustAnswer.com

Megan C :

Your cost basis in the shares, is what the ESOP plan paid for the shares.

Megan C :

This is not taxed as capital gains if you pull the funds out, it's taxed as ordinary income just similar to how a traditional IRA would be taxed.

Customer:

Is that something I should ask the Plan Administrator, or is that even needed?

Megan C :

The custodian of the ESOP plan should be able to give you a breakdown of the cost basis

Customer:

So if I don't need the money, at least not anytime soon, and would ultimately like to keep it as pure retirement, should I roll it to a Traditional or Roth, or what are my options?

Megan C :

You will need to know the basis. When you take the stock out of the ESOP the basis is taxed as ordinary income to you

Customer:

And not cash it out?

Megan C :

Then, when you sell, you pay capital gains tax on the net unrealized appreciation - if the shares have gone up in value

Megan C :

So, you do two things. When you take the distribution you are taking stock. Then, you sell the stock. So there are two tax pieces

Megan C :

If the stock is worth less than the basis, then you have a capital loss.

Megan C :

But, you still have to pay a penalty on the distribution prior to full retirement age and full tax on the basis.

Megan C :

At your age, and if you feel positive about the company's future, I would roll the ESOP to a traditional IRA

Customer:

So you are saying I should find out the cost basis, because if it has capital loss (which I am sure it does), would it help me out some in the tax sense? Again, I don't need the money, so basically just trying to find out how to keep the most of it, whether that be to cash it out now and then invest it, or roll it straight to an IRA (either Roth or Traditional)?

Megan C :

To keep most of the money, you would roll to an IRA

Customer:

Roth or Traditional?

Megan C :

The 10% tax and the current income tax would really eat into your earnings

Megan C :

I would do traditional so that there is no current ordinary income tax

Customer:

What is the rule of thumb on choosing Roth or Traditional?

Customer:

Is it if I think I would be in a lower tax bracket when I retire, then do Traditional?

Megan C :

It depends on what your tax rate will be when you retire...BINGO you got it.

Megan C :

And, if you don't know what your tax will be when you retire, it will probably be lower. You should know if you will have a lot of pensions or other income coming in. If you have a pension and social security then your tax rate should be lower

Customer:

I will have a good 401K coming in, but no pensions.

Megan C :

IF you have a lot of rental property, royalties, etc or know you will get a lot of income in your retirement then you would choose Roth and pay the income tax now while you're paying a lower tax rate.

Megan C :

Based on what you've told me, I'd go traditional

Customer:

OK, thank you for your input.

Customer:

I will consider this along with further research.

Megan C :

Okay great. Is there anything else I can assist you with today?

Megan C :

If there's nothing else I can assist you with today, then please rate me positively by clicking 3-5 stars/smileys on the rating feature located at the bottom of your screen

Customer:

Now how does this service work? Do I rate it now? Am I only charged the initial fee? What if I have other questions on this same topic?

Megan C :

You rate now, yes. You are only charged what you agreed to pay. If you have more questions on this same topic, please come back to this page (bookmark it) and I will be happy to answer your follow up questions. This is true even after you rate, but only if you come back to this very same page.

Customer:

OK, thanks!

Megan C :

You're welcome!

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