Stock ownership programs provide an alternative to traditional, employer-based retirement plans. While they follow similar rules and provide the same advantages as other tax-deferred plans, growth and financial success depends entirely on the financial state of your employer. Cashing out a stock ownership program involves selling shares back — slowly or all at once — to your employer. Because federal laws regulate stock ownership programs just as they do all retirement plans, cashing out follows rules and regulations of both your employer and Internal Revenue Service guidelines.
1. Read through employer and IRS guidelines for cashing out your stock. Contact your employer’s plan administrator if you have questions about your eligibility and/or to confirm that you understand guidelines for cashing out. Refer to Part 126.96.36.199.7 of the Internal Revenue Manual for information on cash-out disbursements. As of the date of publication of this article, IRS guidelines state that you must start the cash-out process within one year after you retire from the company, become disabled or die, and by the fifth year following termination of employment for any other reason.
2. Verify the actual and vested balance of your stock account and set a cash-out timetable. Vesting determines how much of the stock in your account you own based on whether your employer follows a “cliff” or “graded” vesting policy. With a “cliff” policy, you become 100 percent vested all at once within three years of entering the program. In a “graded” policy, vesting occurs in 20 percent increments starting in the second year of the program. Consider what works out best for you and decide on a date to cash out.
3. Request cash-out forms from your plan administrator. Complete the paperwork and indicate whether you want a monthly distribution or lump-sum payment. Sign the forms and return them to your plan administrator.
4. Add the lump-sum amount or distributions for the year from IRS Form 1099-R — which your plan administrator prepares and sends — to the adjusted gross income section on your income tax return.
- Depending on your age at the time you cash out, lump sum or distribution payments may be subject to a 10 percent tax penalty in addition to any income tax due. As of the date of the publication of this article, if you cash out before you are 59 1/2 years old the tax penalty applies.
Items you will need
- Stock ownership plan guidelines
- Internal Revenue Manual
- Cash-out paperwork
- IRS Form 1099-R
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