How Do I Roll a 401(k) to Purchase Employee-Owned Stock?
- 1). Determine what types of stock ownership plans are available. There are two types, one pretax and one after tax. An ESOP is a qualified plan, which means it is covered by the Employee Retirement Income Security Act of 1974 and is pretax, so a transfer from a 401(k) plan to an ESOP would not result in any tax consequences.
An employee stock ownership plan is typically after-tax, which means contributions would be limited to either a contribution of after-tax funds or a payroll deduction of after-tax funds. In this case, if a deposit is permitted, you would first need to take a distribution from your 401(k), or transfer it to an IRA and take a distribution. Either way, a tax liability would result,. The monies can then be deposited to an after-tax plan such as the employee stock ownership plan. - 2). Analyze the direct-purchase options if an appropriate rollover vehicle is not available. If the stock is traded on the open market, then a purchase can be made through common brokerage methods. If not, a private direct investment can be made by purchasing the stock from a current holder. These arrangements are not facilitated through a market mechanism, as that stock is not readily available to the public.
- 3). Make the purchase. Once you have received the funds, have decided which avenues are available to you, and are ready to make the purchase, remember to consider the tax consequences, the consequences to your retirement funds, and the inherent risk of the investment.
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