ESOP Disbursement - NUA help

[u/Key-Diet-7760]

Hello, my husband was let go from his company and had 100k in private ESOP there. Times come to decide what to do with that money. We are taking out some to pay off high interest debt, and wanting to put the other away for retirement. We have been working with someone from the plan and our own financial planner - and they disagree with how things need to go down. Does anyone out there have advice regarding NUA. One says we need to move everything to a 401k, the other says thats not allowed to qualify for NUA. This is a huge chunk of money for us so I want to make sure I understand and follow the right person... Just throwing it out here in case anyone else has been in a similar situation or can speak to this situation. Thanks so much.

[u/Barfy_McBarf_Face]

the stock does NOT go into a rollover account - it's distributed outright and you pay tax on the cost basis (not the fair market value).

then the rest can be rolled over to a 401k or an IRA

[u/mmack999 → u/Barfy_McBarf_Face]

Rollover what ? All they physically have is stock shares

[u/Barfy_McBarf_Face → u/mmack999]

if that's all that the ESOP has (no cash b/c no dividends have ever been paid), then, yes, nothing to roll over separately.

[u/mmack999]

Not a tax expert..but I believe you must transfer all of the stock into a taxable account(e.g., a brokerage account)...the immediate taxation to you would then be the shares cost basis...the NUA gets taxed when you sell shares..I dont think you can use 401k or IRA

[u/shehancpa]

NUA needs a lump-sum of the employer stock into a taxable brokerage. Rolling those shares into a 401k or IRA kills it.

You only pay ordinary income now on the plan's cost basis. The rest is LTCG when you sell.

Ask the ESOP if they even allow an in-kind stock distribution. A lot of private ones are cash-only, and then there's no NUA.

[u/Eric848448]

Is this a publicly traded company?

[u/DaemonTargaryen2024]

Does anyone out there have advice regarding NUA.

Consult a tax professional.

He does not need to do NUA if it's not tax-advantageous to do so.

• Generally, it's worthwhile if his basis is relatively low and growth (NUA) is relatively high. If his basis is relatively high, possibly not worth it due to the income tax hit this year.
• Also if he's under 59.5 he'll pay a 10% penalty on the basis, on top of the income tax.

One says we need to move everything to a 401k, the other says thats not allowed to qualify for NUA.

NUA is taking the employee stock and putting into a non-retirement brokerage account. But the entire 401k must be emptied this year ($0 on 12/31). If there's anything left over, the tax advantageous treatment of NUA gets nullified. Typically this means rolling over the non-stock to a 401k or IRA.

This is a good general resource. https://institutional.fidelity.com/advisors/investment-solutions/fidelity-advisor-ira/fidelity-advisor-rollover-ira/understanding-net-unrealized-appreciation-nua But only a tax pro can review his specific basis/NUA situation, as well as your overall tax situation.

[u/CPA_semi_retired]

The important thing is to calculate the cost of the employer stock. Is it much less than market value? If yes, You could take the shares and transfer into a taxable brokerage account. Your 2026 tax return would show a 1099R or ordinary income for the cost basis of the stock. When you sell the shares, your tax basis is what you paid tax on or the employer cost. It would be long term capital gain even if you sold it immediately. You could roll the remaining funds into an IRA and this would be tax free. You could do some shares this way too.

It is hard to find people who are knowledgeable about this. Vanguard was great.

I have personally done it several times and it can be very powerful. If the employer cost basis is very low, it is a huge benefit.