ESOP 101: Navigating Employee Stock Ownership Plans

By: Scott Sturgeon, JD, MBA, CFP®

Would you like to receive more content just like this directly to your inbox? Click here to subscribe!

An Employee Stock Ownership Plan (ESOP) is a retirement plan that allows employees to acquire an ownership stake in their company through contributions made by the company. This can be a great way for employees to build wealth and feel more invested in the success of their company over time.

If you are currently an employee owner with an ESOP at your company in Kansas City or across the country, it can be helpful to work with a fee-only financial planner. A fee-only financial planner is a financial advisor who does not receive commissions or other forms of compensation based on the advice they recommend or solutions they implement for their clients. This can help to ensure that their advice is unbiased and focused on your best interests.

There are several benefits to working with a fee-only financial planner when it comes to retiring with an ESOP as a significant portion of your overall net worth. First and foremost, they can help you to understand the ins and outs of this type of retirement plan, how the proceeds can be used to fund your lifestyle in retirement, and perhaps most importantly, how to plan around the tax implications of ESOP proceeds.

A fee-only financial planner can also be a valuable resource for ongoing support and guidance in making contributions to other types of investment accounts outside of your ESOP or in pursuing other investments. The tax-deferred nature of an ESOP makes it great for higher income earners like engineers who receive the benefits of stock ownership without having to pay taxes on that benefit when it’s received, often when you’re in a relatively high income tax bracket. When you retire however, you’ll eventually draw on those ESOP proceeds by transferring them to a pre-tax account like a traditional IRA.

Since all those IRA withdrawals are considered taxable income however, if pre-tax accounts are your only asset to live off of, it can lead to a decently large tax bill over time. That can become especially true when you reach a certain age and are forced to take Required Minimum Distributions from your IRA, often in excess of the income you actually need to live off of!

If you’re able to fund other accounts like taxable brokerage accounts, Roth IRA’s, HSA’s, or other tax-advantaged investment vehicles, you can potentially reduce your taxes in retirement by using a combination of those accounts to fund your lifestyle expenses. A fee-only financial planner can help in navigating what types of accounts may make sense to contribute to, as well as how to invest those accounts appropriately.

If you’re an employee owner and participating in an ESOP at your company in Kansas City or anywhere in the country, it is important to work with a financial planner who is experienced in this area and can provide you with the guidance and support you need to make informed decisions. By working with a fee-only financial planner, you can be confident that you are receiving unbiased, fiduciary advice that aligns your finances with whatever you’re working towards and what’s important in your life.

To be clear, having an ESOP as part of your mix of retirement assets is typically a good thing to have. It offers you the ability to build wealth over time in a tax advantaged manner, while simultaneously giving you ownership and by extension, motivation to make your company better. That said, incorporating them into your retirement plans can be complicated.

If you’re grappling with how to fund retirement, how your ESOP fits into that picture, and what additional steps you can be taking to reduce your tax liability in the process, consider scheduling some time with us. We’ll discuss what you’re working towards, your financial objectives, and how partnering with a fee-only financial planner can bring value to your unique situation.

Still curious to learn more? Check out the content below!

ESOP & Retirement: Key Info for Burns & McDonnell Employee Owners

The #1 Hidden Retirement Risk You May Not Be Aware Of