Don’t Lose Tax Breaks by Rolling Your ESOP Stock into your IRA

When you retire, you may choose to roll-over your business-related certified plan holdings into an IRA. You obtained a tax break for the contribution to those strategies, so you are going to pay normal income tax rates when you withdraw them from your IRA.

However, if you bought your organization stock through a qualified plan, you could lose tax breaks on it in the event you roll that over to the IRA.

In the event you bought your company's stock via an Employee Stock Ownership Plan (ESOP), through your 401(k) or other qualified retirement plan, and also the stock has appreciated, you can pay reduced taxes on it if you do not roll it over into an IRA. Here's how the tax break functions.

Ask for the shares of your business stock be dispersed to you. You will be required to pay tax on the quantity you contributed to their purchase under the qualified strategy. That quantity is taxed at normal income and that 'purchased' amount so will become your tax basis in that stock.

Naturally if the stocks have appreciated significantly beyond their value to you, their market value will be higher than your tax basis. The difference between the stock's present market value and your tax basis in them is the 'net unrealized appreciation' (NUA). This NUA is the gain you'll have if you offered the stock immediately. In the event you do, you'll be taxed on it at the reduced 'long-term' capital gains rate no matter how long you owned that stock, since it's treated as being held long-term. Therefore, the tax break is you may trade what would normally be taxed as normal income (at rates up to 35%) as capital gains (15% in 2012).

You're not obliged to market the stock, though, which means you may hold on to the stock as long as you want - maybe selling off blocks of shares as money is required, or during a period of years, to spread out the tax cost. You'll constantly only pay the capital gains in addition to your cost basis at the long-term capital gains rate. You may even allow beneficiaries to inherit that shares and they'll also inherit the tax break!

If you simply rolled that stock into an IRA, you would be paying ordinary income tax rates as well on that part which you may use the long-term capital gains tax rate by getting the stock directly. So if you did that, you would be losing a tax break - and money.