Bret Keisling shares an excerpt featuring Peter Newman of Peak Wealth Planning, who gives a very quick look at ESOP Account Diversification taken from next week's episode of The EsOp Podcast.
In that episode you'll hear our deepest dive yet on the nuts and bolts of ESOP Account Diversification and Distributions. ESOP account owners usually have the right at various times to diversify their holdings by selling their ESOP shares back to the ESOP Trust or the company, and understanding your options with Diversification and Distributions is critical for planning a successful retirement.
Listen to this episode on Soundcloud or subscribe on Google / YouTube Podcasts, iHeart, Spotify, Amazon, or Apple Podcasts...
... or watch the video below.
The ESOP Podcast is licensed under a CC BY-NC-ND Creative Commons License.
Mini-cast 251 Show Notes
For the first part of our conversation with Peter Newman, check out The EsOp Podcast Episode 263: Peter Newman Part 1 - Successful Retirement Planning.
We recommend signing up for the Peak Wealth Planning newsletter.
You can easily request The Employee Owner's Guide to Diversification and Retirement Planning from Peak Wealth Planning here.
About Peter Newman
Peter Newman founded Peak Wealth Planning in 2014 to provide financial planning and investment management for individuals who built their wealth through ESOP participation, business ownership, or real estate investing. He helps families diversify their concentrated stock, reduce estate taxes, preserve wealth, and generate stable retirement income.
Peter holds the Chartered Financial Analyst designation, considered by many to be the gold standard for investment management. Prior to founding Peak Wealth, Peter spent two decades in Treasury Operations at the University of Illinois System where he managed capital financing, insurance programs, banking, agricultural properties, and $3 billion of combined operating and endowment investments.
In his free time, Peter enjoys vegetable gardening, biking, skiing, and home remodeling.
Learn more about Peter here and learn more about working with Peak Wealth Planning here.
Mini-cast 251 Transcript
[00:00:00] Bret Keisling: Welcome to the EsOp Mini-cast. Thank you so much for listening. My name is Bret Keisling and, as it says on my business cards, I'm a passionate advocate for employee ownership. On our primary EO/ESOP podcast, we're in the midst of a three-part series featuring Peter Newman, founder, and principal of Peak Wealth Planning.
[00:00:25] We dropped part one earlier this week in an episode called Successful Retirement Planning. Part two drops January 16th and it's our deepest dive yet on the podcast on the nuts and bolts of diversification and distributions. The final episode airs January 23rd and it discusses personal financial wellbeing for employee owners.
[00:00:47] In order to tee up part two dropping next week, I thought on the Mini-cast we would share this very brief excerpt that gives them an overview of diversification. Keep in mind that oftentimes we'll speak on the podcast in generalities and your specific ESOP plan may be a little bit different. So, always check your own plan or at least the summary plan description of your plan so that you know exactly what your plan calls for.
[00:01:11] With that, here's Peter Newman with a very brief overview on diversification.
[00:01:16] Peter Newman: Diversification is usually the first time the idea of retirement planning comes up. And what does diversification mean and when does it happen? Diversification means that you have the option, but not the obligation, to sell back some shares to the company, or to the ESOP, to the trust, as a participant in this tax-deferred retirement account.
[00:01:42] And most companies that I see offer the first diversification event when you hit the milestone age of age 55 and you've had at least 10 years of participation in the ESOP. And at age 55, if you're eligible for diversification, you'll receive a notification that says, Hey, Joe, you have 2 million in your employee stock ownership plan, and you're eligible to sell back 500,000 of that.
[00:02:12] And then the company, when you sell that 500,000 back, you'll indicate on a form, I would like to sell my 500,000 back, and I would like to either: A, move that money to an Individual Retirement Account, B, I might be able to move that money to a company 401k plan, or C, I might receive a check. I might say, hey, mail me a check, I want some money.
[00:02:38] And if you select option C, when you turn that form back in, you need to be aware that you will owe a regular income tax on that 500,000. In my example, and because you're below age 59 and a half in my example for someone age 55, you will also owe a 10 percent IRS tax penalty. Many folks are not aware of the penalty for below age 59 and a half.
[00:03:02] And there are definitely pros and cons to why one might take the diversification and receive a check. There's pros and cons to why you might continue to move it over to an IRA and build wealth for retirement. But the other thing to understand is that 55 is an option. You're not required to sell back those shares.
[00:03:23] You could say, hey, I think my company is doing really well. I want to let my 2 million grow even more, in our example, and I'm going to wait and see at age 56, 57, 58, 59, how the company is doing. But that option of that 25 percent remains available each year.
[00:03:42] Under IRS guidelines and most summary plan documents I've seen for ESOPs, that goes up to 50% at age 60.
[00:03:50] So, it gives you an incremental stepping stone to diversify additional shares. And I'll stop there Bret, and see, you know, what thoughts you have before we go a layer deeper into diversification.
[00:04:01] Bret Keisling: I appreciate that. And let me just clarify, the up to 50% at age 60, is that 50% is the diversification not the tax penalty?
[00:04:10] Peter Newman: Correct. That's 50% diversification. So, in our example, let's just say, to keep the math simple, you know, you had a 2 million account at age 55, let's pretend there were no share value changes and you didn't receive any additional shares between age 55 and 60, just to make it simple. You could sell back 500,000 at age 55, you wait until you're age 60, and then you sell back another 500,000.
[00:04:36] That gets you half a million of two million, half of all the shares and all the value you've accreted. Once you sell back the first 25%, it doesn't go 50 percent of the remaining amount. It's 50 percent of all the shares you've ever received.
[00:04:50] Bret Keisling: Good.
[00:04:50] Peter Newman: So, that's an excellent question.
[00:04:51] Bret Keisling: This will wrap up this episode of the Mini-cast. I hope you'll join us Tuesday, January 16th, for part two of my three-part podcast episodes with Peter Newman of Peak Wealth Planning.
[00:05:03] Thank you so much for listening. This is Bret Keisling. Be well.
[00:05:08] Bitsy McCann: We'd love to hear from you! You can find us on Facebook at EO Podcast Network and on Twitter [X] @EsOpPodcast. This podcast has been produced by Bret Keisling for the EO Podcast Network. Original music composed by Max Keisling. Branding and marketing by BitsyPlus Design. And I'm Bitsy McCann.
Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.
A note on the transcript: This transcript was produced by Descript, an automated transcription service. While it has been reviewed by The EsOp Podcast, we cannot guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.