ESOP proceeds invest in Co. Stock or pay off debt

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rtw68
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Joined: Sun Oct 07, 2018 9:49 am

ESOP proceeds invest in Co. Stock or pay off debt

Post by rtw68 » Sun Oct 07, 2018 9:53 am

Ok, long story short, I have around $116K in my ESOP (completely company contributed). The company is ending the ESOP and offering stock in the company instead. My options are to either take the cash (and pay the 10% penalty/taxes of course), leave it in stock, put it all in an IRA, or split between IRA and company stock. Company is strong, has very good leadership, and growing consistently. I have been employed with them for five years and previous to that was an outside consultant since the early 2000's.

I don't have a lot invested for retirement (long story short, 50 years old this year, too many past mistakes). We also have a lot debt accumulated. I make very good money (salary and bonus) but need to figure out which direction to go.

Taking the cash would net about 72K and along with my bonus in December (which should be slightly higher then last year due to company performance) would wipe out all of our debt besides our mortgage and car loans. The savings with all the debt paid off would result in about $1,500 cash back in our pocket per month after expenses that were formerly put on credit cards,etc.

There are no guarantees in life, and the company could continue to do very well, or could face a downturn if the US economy takes a hit. If I have all of my debt paid off (close most accounts not accumulate the amount of debt like this again) and be able to use my bonuses for other than debt service each year, we could have house and cars paid off in three years (accounting for vacation expenses paid in cash from bonuses as well).

Am I better off dealing with my debt as I can and leaving the stock in the company (forgetting I have it for a larger potential upside), or am I better off getting the debt paid off, being able to save money every month, and over the next three years be completely debt free and own my home outright?

I am planning on talking to someone as well, but am interested in what others might have to say.

DoctorPhysics
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Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by DoctorPhysics » Sun Oct 07, 2018 11:04 am

How much % of the esop is of net worth and asset allocation?

Are you balanced and taking appropriate risk for your time frame?

Usually, we don’t like to tie our income risk and portfolio risk to the same company, most sell the esop frequently and reinvest the proceeds into index funds.

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BL
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Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by BL » Mon Oct 08, 2018 1:05 am

It doesn't help much to simply pay off debt unless you have a plan to stay out of future debt.

I get the impression that you have a spending emergency so simply paying off debt is not going to solve that problem. Example one: huge debt but must take a vacation. Suggest you list all your debts, interest rates, and time to pay them off at your current rate (even if you choose not to share). Vow never to charge anything you don't have the money in hand to pay for. Keep track of all your family spending to see where it is going. Look for ways to cut spending: phone plans, cable, eating out, travel, etc.

Make a plan to pay off debt and live below your income. I suggest you either cut up your credit cards or at least drop them into a milk carton, add water, and store in freezer. Never use a card that was not paid off, because you would be paying interest on purchases immediately that way.

Dave Ramsey has some good advice for getting and staying out of debt.

MathIsMyWayr
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Location: CA

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by MathIsMyWayr » Mon Oct 08, 2018 1:26 am

What are the ESOP basis and the current value? If it has appreciated significantly since grant, can you take NUA? If you meet any of the triggering events of NUA, the basis is subject to ordinary income tax and the appreciation is subject to capital gains tax.

inbox788
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Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by inbox788 » Mon Oct 08, 2018 1:44 am

rtw68 wrote:
Sun Oct 07, 2018 9:53 am
Ok, long story short, I have around $116K in my ESOP (completely company contributed). The company is ending the ESOP and offering stock in the company instead. My options are to either take the cash (and pay the 10% penalty/taxes of course), leave it in stock, put it all in an IRA, or split between IRA and company stock. Company is strong, has very good leadership, and growing consistently. I have been employed with them for five years and previous to that was an outside consultant since the early 2000's.

I don't have a lot invested for retirement (long story short, 50 years old this year, too many past mistakes). We also have a lot debt accumulated. I make very good money (salary and bonus) but need to figure out which direction to go.

Taking the cash would net about 72K and along with my bonus in December (which should be slightly higher then last year due to company performance) would wipe out all of our debt besides our mortgage and car loans. The savings with all the debt paid off would result in about $1,500 cash back in our pocket per month after expenses that were formerly put on credit cards,etc.

There are no guarantees in life, and the company could continue to do very well, or could face a downturn if the US economy takes a hit. If I have all of my debt paid off (close most accounts not accumulate the amount of debt like this again) and be able to use my bonuses for other than debt service each year, we could have house and cars paid off in three years (accounting for vacation expenses paid in cash from bonuses as well).

Am I better off dealing with my debt as I can and leaving the stock in the company (forgetting I have it for a larger potential upside), or am I better off getting the debt paid off, being able to save money every month, and over the next three years be completely debt free and own my home outright?

I am planning on talking to someone as well, but am interested in what others might have to say.
What is your tax rate?

Is the choice $116k in IRA vs $72k in cash? And can you diversify the IRA tax-free/deferred? That's what I'd do if available and deal with the annual operating budget problems separately and aggressively.

Are they offering any 401k or other retirement replacement? I was going to point out that you can qualify for catch up contributions, but it's not clear you're going to have the cash flow to even reach the old limit in the immediate future, but something to keep in mind after you've dealt with high cost debt issues.

What rates are you paying for mortgage and car loan?

Valuethinker
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Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by Valuethinker » Mon Oct 08, 2018 3:39 am

rtw68 wrote:
Sun Oct 07, 2018 9:53 am
Ok, long story short, I have around $116K in my ESOP (completely company contributed). The company is ending the ESOP and offering stock in the company instead. My options are to either take the cash (and pay the 10% penalty/taxes of course), leave it in stock, put it all in an IRA, or split between IRA and company stock. Company is strong, has very good leadership, and growing consistently. I have been employed with them for five years and previous to that was an outside consultant since the early 2000's.

I don't have a lot invested for retirement (long story short, 50 years old this year, too many past mistakes). We also have a lot debt accumulated. I make very good money (salary and bonus) but need to figure out which direction to go.

Taking the cash would net about 72K and along with my bonus in December (which should be slightly higher then last year due to company performance) would wipe out all of our debt besides our mortgage and car loans. The savings with all the debt paid off would result in about $1,500 cash back in our pocket per month after expenses that were formerly put on credit cards,etc.

There are no guarantees in life, and the company could continue to do very well, or could face a downturn if the US economy takes a hit. If I have all of my debt paid off (close most accounts not accumulate the amount of debt like this again) and be able to use my bonuses for other than debt service each year, we could have house and cars paid off in three years (accounting for vacation expenses paid in cash from bonuses as well).

Am I better off dealing with my debt as I can and leaving the stock in the company (forgetting I have it for a larger potential upside), or am I better off getting the debt paid off, being able to save money every month, and over the next three years be completely debt free and own my home outright?

I am planning on talking to someone as well, but am interested in what others might have to say.
You need to pay off the debt and immediately earmark that cash flow for investing.

I would do that over company stock. In a downturn, the company stock price could fall *and* you could lose your job for the same reason of bad business conditions. If you are really worried the stock will shoot away, do not keep more than $10k.

You would not put $70k into your company stock now? You have to treat this as a new investment.

The main challenge is not to spend that additional cash flow but to save it. Saving $1500 pcm for 10 years would give you $180 k + investment returns. Possibly as much as $360k (I rather suspect less, but it would be a start).

rtw68
Posts: 5
Joined: Sun Oct 07, 2018 9:49 am

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by rtw68 » Mon Oct 08, 2018 4:46 am

BL wrote:
Mon Oct 08, 2018 1:05 am
It doesn't help much to simply pay off debt unless you have a plan to stay out of future debt.

I get the impression that you have a spending emergency so simply paying off debt is not going to solve that problem. Example one: huge debt but must take a vacation. Suggest you list all your debts, interest rates, and time to pay them off at your current rate (even if you choose not to share). Vow never to charge anything you don't have the money in hand to pay for. Keep track of all your family spending to see where it is going. Look for ways to cut spending: phone plans, cable, eating out, travel, etc.

Make a plan to pay off debt and live below your income. I suggest you either cut up your credit cards or at least drop them into a milk carton, add water, and store in freezer. Never use a card that was not paid off, because you would be paying interest on purchases immediately that way.

Dave Ramsey has some good advice for getting and staying out of debt.
The debt we have is not causing a spending emergency at this time, but could very well if we continue in the same direction, or if I lose my current income. I am able to service the debt each month, but that's it. Very discouraging and I'm very upset at myself to be at this point. We would be cutting up the majority of the cards we have. Part of the payoff would be two loans that are closed ended and would not be available for future usage.

rtw68
Posts: 5
Joined: Sun Oct 07, 2018 9:49 am

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by rtw68 » Mon Oct 08, 2018 4:53 am

inbox788 wrote:
Mon Oct 08, 2018 1:44 am
rtw68 wrote:
Sun Oct 07, 2018 9:53 am
Ok, long story short, I have around $116K in my ESOP (completely company contributed). The company is ending the ESOP and offering stock in the company instead. My options are to either take the cash (and pay the 10% penalty/taxes of course), leave it in stock, put it all in an IRA, or split between IRA and company stock. Company is strong, has very good leadership, and growing consistently. I have been employed with them for five years and previous to that was an outside consultant since the early 2000's.

I don't have a lot invested for retirement (long story short, 50 years old this year, too many past mistakes). We also have a lot debt accumulated. I make very good money (salary and bonus) but need to figure out which direction to go.

Taking the cash would net about 72K and along with my bonus in December (which should be slightly higher then last year due to company performance) would wipe out all of our debt besides our mortgage and car loans. The savings with all the debt paid off would result in about $1,500 cash back in our pocket per month after expenses that were formerly put on credit cards,etc.

There are no guarantees in life, and the company could continue to do very well, or could face a downturn if the US economy takes a hit. If I have all of my debt paid off (close most accounts not accumulate the amount of debt like this again) and be able to use my bonuses for other than debt service each year, we could have house and cars paid off in three years (accounting for vacation expenses paid in cash from bonuses as well).

Am I better off dealing with my debt as I can and leaving the stock in the company (forgetting I have it for a larger potential upside), or am I better off getting the debt paid off, being able to save money every month, and over the next three years be completely debt free and own my home outright?

I am planning on talking to someone as well, but am interested in what others might have to say.
What is your tax rate?

Is the choice $116k in IRA vs $72k in cash? And can you diversify the IRA tax-free/deferred? That's what I'd do if available and deal with the annual operating budget problems separately and aggressively.

Are they offering any 401k or other retirement replacement? I was going to point out that you can qualify for catch up contributions, but it's not clear you're going to have the cash flow to even reach the old limit in the immediate future, but something to keep in mind after you've dealt with high cost debt issues.

What rates are you paying for mortgage and car loan?
Adding the $116K back as incoming would push us into the 24% bracket (married filing jointly).

We have some additional options besides converting the ESOP proceeds into company stock (can do a mixture of things), I do have a 401K through work currently.

They are also looking at increasing matching in the 401K because of the elimination of the ESOP.

Our mortgage loan rate is 4.75% and one car loan is 5% (credit union) and the other is 0%.

rtw68
Posts: 5
Joined: Sun Oct 07, 2018 9:49 am

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by rtw68 » Mon Oct 08, 2018 4:59 am

Valuethinker wrote:
Mon Oct 08, 2018 3:39 am
rtw68 wrote:
Sun Oct 07, 2018 9:53 am
Ok, long story short, I have around $116K in my ESOP (completely company contributed). The company is ending the ESOP and offering stock in the company instead. My options are to either take the cash (and pay the 10% penalty/taxes of course), leave it in stock, put it all in an IRA, or split between IRA and company stock. Company is strong, has very good leadership, and growing consistently. I have been employed with them for five years and previous to that was an outside consultant since the early 2000's.

I don't have a lot invested for retirement (long story short, 50 years old this year, too many past mistakes). We also have a lot debt accumulated. I make very good money (salary and bonus) but need to figure out which direction to go.

Taking the cash would net about 72K and along with my bonus in December (which should be slightly higher then last year due to company performance) would wipe out all of our debt besides our mortgage and car loans. The savings with all the debt paid off would result in about $1,500 cash back in our pocket per month after expenses that were formerly put on credit cards,etc.

There are no guarantees in life, and the company could continue to do very well, or could face a downturn if the US economy takes a hit. If I have all of my debt paid off (close most accounts not accumulate the amount of debt like this again) and be able to use my bonuses for other than debt service each year, we could have house and cars paid off in three years (accounting for vacation expenses paid in cash from bonuses as well).

Am I better off dealing with my debt as I can and leaving the stock in the company (forgetting I have it for a larger potential upside), or am I better off getting the debt paid off, being able to save money every month, and over the next three years be completely debt free and own my home outright?

I am planning on talking to someone as well, but am interested in what others might have to say.
You need to pay off the debt and immediately earmark that cash flow for investing.

I would do that over company stock. In a downturn, the company stock price could fall *and* you could lose your job for the same reason of bad business conditions. If you are really worried the stock will shoot away, do not keep more than $10k.

You would not put $70k into your company stock now? You have to treat this as a new investment.

The main challenge is not to spend that additional cash flow but to save it. Saving $1500 pcm for 10 years would give you $180 k + investment returns. Possibly as much as $360k (I rather suspect less, but it would be a start).
That is exactly what I want to do. First increase my 401k investment from 3% - 6% and build up the rest in savings for an emergency (which shamefully we do not have now).

The company has been a on very consistent growth pattern (mainly by acquisition and organically in a smaller degree). Stock value has grown to $242 per share, but my concerns are having all my eggs in one basket, what if we face a downturn, and the biggest thing I see as an issue is the control to which stock can be sold (annually and for certain amounts). It would really need to be treated as a very long term investment, which I get.

I see the freight train coming debt-wise. We are able to service the debt but never can get ahead, and with the interest rate on the cards/etc.

We are a single income family (my wife babysits our grandkids) so even though I might be foregoing a very large potential growth in stock value, seeing my personal net worth in the crapper over this debt leaves me very conflicted.

rtw68
Posts: 5
Joined: Sun Oct 07, 2018 9:49 am

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by rtw68 » Mon Oct 08, 2018 5:01 am

MathIsMyWayr wrote:
Mon Oct 08, 2018 1:26 am
What are the ESOP basis and the current value? If it has appreciated significantly since grant, can you take NUA? If you meet any of the triggering events of NUA, the basis is subject to ordinary income tax and the appreciation is subject to capital gains tax.
Based on what the financial company is telling us, if we convert the ESOP shares to cash, we would only be facing the 10% penalty and of course ordinary income tax. NUA is not mentioned in the paperwork at all.

inbox788
Posts: 5653
Joined: Thu Mar 15, 2012 5:24 pm

Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by inbox788 » Mon Oct 08, 2018 11:36 am

rtw68 wrote:
Mon Oct 08, 2018 4:53 am
Adding the $116K back as incoming would push us into the 24% bracket (married filing jointly).

We have some additional options besides converting the ESOP proceeds into company stock (can do a mixture of things), I do have a 401K through work currently.

They are also looking at increasing matching in the 401K because of the elimination of the ESOP.

Our mortgage loan rate is 4.75% and one car loan is 5% (credit union) and the other is 0%.
I see now. Taking out the $116k leads to $28k in taxes (24%) and 10% more penalty. That's a whopper of a cut. On the other hand, I'm inferring you have nearly 70k in high interest debt, which adds up to quite a big cost as well. And there's the opportunity cost. You'll be kicking yourself if that becomes $500k in 10 or 15 years, which is quite possible.

There is the single company risk with the ESOP/company stock. What are these additional options? If you can get $116k into 401k or other tax-deferred and avoid $28k immediate taxes + additional penalties, I'd go that route and aggressively fight the bad debt.

The vacation thing wasn't clear, but you're essentially charging your vacations to your credit card and not paying that off for years (until you've paid off all past debt). That vacation gets very expensive, likely costing 2-3X after you've paid all the original costs and added interest. Same applies to anything else you're charging up.

You'll need cash flow to get your 401k matching. That's free money you don't want to lose out on!

IMO, cashing out ESOP isn't the answer. Expense cutting and budgeting is going to be, whether you drain your ESOP or not. The 4-5% interest loans aren't that horrible, and you might look into consolidation and rate lowering of other bad debt.

Look at some of the get me out of debt threads here that have helped some folks here and consider starting your own.

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lthenderson
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Re: ESOP proceeds invest in Co. Stock or pay off debt

Post by lthenderson » Mon Oct 08, 2018 11:52 am

If it were me, I would transfer it into a self directed IRA or 401(k) plan if they had some good options. No way would I take the tax penalty and pay income tax on it until I am retired.

As for the other debts, I would work hard to cut expenses where possible to get them to a manageable level and then proceed to build that emergency fund while continuing to pay off the rest of the debts.

P.S. Cutting up credit cards isn't the same as calling up the company and cancelling them. A cut up credit card is just one phone call away from getting a duplicate sent to your home address and remains on your credit report. A cancelled credit card will eventually fall off of your credit report.

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