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Looking for a little Foolish wisdom once again........

I work for a private company that has an ESOP program. The company is in the process of being purchased by a public corporation and, upon finalizing the deal, our ESOP will terminated.

From what I understand, the ESOP distributions must be rolled over into the new company's 401k plan or a Rollover IRA or be subject to taxes and the 10% early withdrawl penalty.

I've got no problem paying taxes on the money but the 10% penalty chaps me.

1. Is there any way to access a portion of this money so that I can pay down my home mortgage and not incur the 10% penalty?

2. What about if I used it to pay down a mortgage I have on an investment property? Could I use the 10% penalty as a business expense? (OK -I'm probably reaching on that one!)

I'm a long way off from retiring and already have a good start on my retirement savings so my goal is to access some of the ESOP money now for current purposes (mortgage pay down, etc).

Any help would be greatly appreciated -and thanks in advance!

canuck104
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I work for a private company that has an ESOP program. The company is in the process of being purchased by a public corporation and, upon finalizing the deal, our ESOP will terminated.

From what I understand, the ESOP distributions must be rolled over into the new company's 401k plan or a Rollover IRA or be subject to taxes and the 10% early withdrawl penalty.


How did you come to this understanding? I ask because not all employee stock ownership plans are subject to this rule. If you have plan paperwork telling you this it's one thing, but if "Sally in Accounting said that she heard from Bob in Marketing that June in Payroll said" is your source, get it straight from the plan.

If your plan is subject to the rule, no, you can't get around it in the ways you mention.

Phil
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Thanks for the reply, Phil. I've got paperwork from my company that alludes to the options I mention above; however, the document is not completely clear. I've asked our company for a copy of the ESOP document so that I can get the facts right from the horse's mouth, but from what I've read -and from what you've posted- I'm not optimistic that I'll be able to use some of the money in the way I wanted to.
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From what I understand, the ESOP distributions must be rolled over into the new company's 401k plan or a Rollover IRA or be subject to taxes and the 10% early withdrawl penalty.

I've got no problem paying taxes on the money but the 10% penalty chaps me.

1. Is there any way to access a portion of this money so that I can pay down my home mortgage and not incur the 10% penalty?

2. What about if I used it to pay down a mortgage I have on an investment property? Could I use the 10% penalty as a business expense? (OK -I'm probably reaching on that one!)

I'm a long way off from retiring and already have a good start on my retirement savings so my goal is to access some of the ESOP money now for current purposes (mortgage pay down, etc).


Phil as already answered the tax question, so here's another thought.

If you roll the money into the new company's 401(k) plan, would you be able to borrow against it?

Yes, you would pay interest on it, but you would be paying the interest to yourself. There is no 'double-taxation', since taxes are based on income, and the loan does not add to taxable income. You are essentially locking in the rate of return on that portion of the account at the interest rate. (Personally, over the last year, my account would have been better off if I had done this......) Assuming that the interest rate is comparable to what you would have earned in other investments, you will end up with a similar amount of money in the account as if you had left it in those investments. So when you go to withdraw, there will be no difference in the taxes paid, either, as your income won't be different then.

You would have to have the money paid back through payroll deductions, so if cash flow is an issue, this might not work for you.

The big danger in this is if you end up leaving your job with the new company, either voluntarily or involuntarily, you may need to pay back the money within a short period of time (often 30 - 90 days) or the remaining principal balance will become a distribution that you will have to pay taxes and the 10% penalty on. Some plans allow you to continue paying back loans even after you've left the company, but for those that don't, this is a significant risk that needs to be considered.

AJ
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10% is only the federal penalty. Many states impose their own additional penalty. In California, the state penalty is 2.5%.

Debra
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Why the rush to pay down the mortgages? If you are a long way from retiring, you could generate a significant return on that money over the years versus the money being placed into the real estate.
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