Employee Stock Plan Procedures to Rollover IRAs

When you leave your job, one of the first things you need to do is decide how to handle the retirement plan your former employer provided. That means rolling over your ​401(k)​ money into an IRA that you can control. If your ​401(k)​ plan included stock in your company, you might be able to move those shares in-kind, rather than selling them and moving the funds into your new IRA.

When Should You Create a New IRA?

When you move money from the mutual funds and employer stock in your ​401(k)​, it is a good idea to set up a new shell IRA account first. Setting up a new IRA account rather than commingling the funds makes it easier to track the performance of the funds as you move forward. You can set up that shell account with the mutual fund, bank or brokerage account of your choice, then contact that firm and ask for the transfer forms you need to move the money from your ​401(k)​.

The IRS has strict guidelines regarding rollovers to or from a ​401(k)​ account. Any amount that is kept and not rolled over will be taxed and possibly assessed a penalty. If you elect to take out money as a distribution with the intent to roll it over within the allowed ​60-day​ window for tax deferral, ​20 percent​ will be withheld and you must add your own funds equal to the ​20 percent​ being withheld.

It is better to have your ​401(k)​ directly distributed to another IRA because there is no ​20 percent​ withholding. This means creating a new IRA before the rollover.

What's an Employee Stock Purchase Plan?

Many companies offer their employees an Employee Stock Purchase Plan (ESPP). An ESPP allows employees to purchase employer stock at a discount through paycheck deductions. The IRS restricts the total deferral amount to ​$25,000​ per year.

If you have an Employee Stock Purchase Plan outside your ​401(k)​, you do not need to roll that money over. Typically the ESPP is administered by a brokerage firm or investment bank, and those funds can simply remain where they are. If you want to sell the stock you own and take the money you can, but that money does not become part of your IRA rollover.

It is important to consider the tax implication when deciding to rollover stocks into a retirement account versus leaving them in the brokerage account.

How to Transfer Employer Stock

In some cases employees are allowed to invest part of their ​401(k)​ money in the stock of the company they work for. If your ​401(k)​ does contain shares of company stock, you can choose whether to bring those shares into your rollover IRA. If you do want to bring those shares directly into your rollover IRA, you need to inform both the ​401(k)​ administrator and the new IRA administrator of that desire.

If you prefer, you can sell the shares of employee stock contained in your ​401(k)​ and simply bring the cash into your rollover IRA. Since the account is tax-deferred, there are no tax consequences to this type of sale.

Why You Should Review the Transfer

It is very important that a rollover from a ​401(k)​ to an IRA be handled as a direct rollover. If the money does not go directly from one administrator to another, that could trigger a tax that could eat up a great deal of the money in the account. Once you start the transfer process, you need to check up on it to make sure it is completed on time. You can contact the administrator you chose for the rollover IRA and ask about the status of the transfer at any time.