If you’ve worked for a long time, you already know about how great the benefits are in this grocery company. Around since 1930, it has become the largest employee-owned grocery chain in America. You’re perhaps one employee who’s worked with them for years and realized how unusually generous their benefits continue being.
One of those is their employee stock ownership plan (ESOP) that’s one of the best available in the country. It’s an investment feature many who’ve worked there prefer because it gives them continual income into their retirement years without having to rely on less dependable financial sources.
If you’ve decided to take this investment benefit, maybe you’re still wondering what to do with your ESOP as you head toward retirement. Your options can vary, though it requires some smart strategy depending on what your age is.
Some prefer to retire early, and others wait until they’re older. In either case, here’s some tips to look at since many myths have developed about your ESOP. It’s time to see what works best for your own financial situation.
Can You Leave Your ESOP Forever?
We’ve seen some misconceptions develop about how long you can keep your ESOP there. You’ve perhaps heard some tell you it’s possible to leave your ESOP there for life.
This isn’t true, though you can keep it in there for a while if you’ve decided to retire before the age of 62. By March of the year after you turn 62, you are required to take full distribution of your ESOP. Packets are sent out in February.
The company sends you the distribution paperwork when the time comes, though this doesn’t end the story on what’s possible with yourESOP. If you’re slightly younger, you have other options available to give you some supplemental income before being required to cash out.
Using the “Diversification Election”
For those just turning 55, you’re at a perfect age to enjoy some additional ESOP benefits from your employer. If you’ve worked at least a decade at the company, you can start to take distributions while still working there. They call this “Diversification Election”, and it increases your income substantially while still being employed.
The downside to this is you get a 10% penalty, plus taxation on your distributions as income. One way to prevent penalties is to roll your ESOP into an IRA within 60 days.
Yet another method is available to avoid tax penalties, but it again depends on what your age is at the time.
Using the Substantially Equal Periodic Payment Arrangement
Otherwise known as SEPP, the Substantially Equal Periodic Arrangement is a system helping you take distributions without a 10% penalty. Still, it’s only applicable to those under 59 1/2 years of age. It’s also known as a 72(t) arrangement in IRS parlance, and it’s worth looking into to help yourself bring more income into your household without subtractions.
How Much of Your ESOP Can You Take Out After Retirement?
You can’t expect to dip into your ESOP after retirement and leave the rest in place. You are required to take the whole thing out if you need some or all of it for a particular financial emergency.
At the time of this distribution, you can take it all as cash or as a stock certificate. Once you take this action, however, you can’t reverse it. Taxes may apply as well, depending on how you use your distribution.
What makes your employer extra good with their ESOP‘s is they don’t force you to sell your stock back to them. They let you benefit, including passing it on to your heirs if you want.
Contact us at S.A.C. Investments to learn more about what you can do with an ESOP and ways you can roll it over to other sources of retirement income.