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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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How much will I be penalized if I cash out my ESOP

Resolved Question:

Upon leaving my company, I will be cashing out my ESOP shares (as opposed to rolling it over into another retirement plan) presently worth $50K? I would be cashing out to start my own small business - are there any tax breaks in that, or any potential decrease in penalty (since I'm starting a business)? If not, what can I roll my money into that will allow me to access it within a year?
Submitted: 7 years ago.
Category: Tax
Expert:  Christopher Phelps replied 7 years ago.

An ESOP is treated the same as any other qualified retirement plan. Qualified retirement plan distributions (i.e. 401(k) plan) will be subject to income tax and the 10% early distribution penalty if made prior to age 59 and 1/2. You may avoid paying the 10% early distribution penalty if the reason for the withdrawal meets an exception.

The following are exceptions:

1. Distributions upon death or disability (certified as complete 100% disability);

2. Distributions upon separation of service that are part of a series of substantially equal payments based on the life of the participant or joint lives of the participant and beneficiary;

3. Distributions after separation from service provided the participant has reached age 55 at the time of distribution;

4. distributions to a non-participant under a QDRO (divorce);

5. Distributions not exceeding deductible medical expenses incurred in the year of distribution without regard to whether you itemized (i.e. you may avoid the 10% penalty on the portion of your IRA distribution equal to the amount of medical deductions in excess of 7.5% of your AGI).

Use form 5329 (http://www.irs.gov/pub/irs-pdf/f5329.pdf) to report the distribution and to determine the penalty amount. If you qualify for an exception to the 10% penalty, put the appropriate code in line 2, Part I to indicate the reason why that part of the distribution is not subject to the early distribution penalty.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Customer: replied 7 years ago.
Thank you for this information. However, just to clarify...there are no penalties if I roll it over into an IRA or something similar (retirement plan)?
Expert:  Christopher Phelps replied 7 years ago.

Correct. If you roll the proceeds there are no withholdings or penalties. Income tax and penalties will apply if you take a distribution from the IRA.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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