Esop

[MarssD]

Is there a 10% penalty for an ESOP withdrawal before retirement like there is for an401k?

[TaxandtheCurious]

Thank you for your question.  ESOP are taxed upon an employee taking distributions. Distributions taken by the employees under age 59½ are considered early withdrawals and would be subject to IRS mandated taxes, along with an early penalty tax of 10%.  Typically the vested balance in your ESOP can only be cashed if you retire, end employment, become disabled or die. If you want to avoid the tax and penalty, you must transfer/rollover the money from your ESOP shares into another retirement account such as a traditional IRA and once your are 59 1/2 avoid the penalty. 

However, the distributions of dividends from employer stock held inside an ESOP are not subject to the early distribution 10% penalty tax, no matter when you receive the dividend.

[MarssD]

These were awarded to me through a divorce, I was never employed by them and was told last year I have the option once a year to rollover or withdraw it all. Is it still penalized? Thank you!

[TaxandtheCurious]

Thank you for the clarification. If you withdraw before 59 1/2 the penalty and tax still apply. If you rollover this is not a taxable event at the time of rollover and it is not taxable until you actually withdraw funds. Upon withdrawal, taxes will be due and whether a tax penalty applies or not will depend on your age at the time.