Company sold

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bmh33
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Company sold

Post by bmh33 »

Hi all -

I have worked for a private company for the last 15 years. During my employment (I am still employed there), I was awarded shares of company stock. Our company was recently sold and I will be getting paid out for those shares (plus the multiplier) sometime over the next few weeks. The deposit will go directly into my 401k. I will then have a 5 month window that I can take one of three options: 1. Take the deposit as cash and pay the taxes (which I won't do), 2. Transfer some or all of the money to a pretax investment vehicle (Traditional IRA), or 3. Leave the money in the 401k for good.

Here's a snapshot of our situation:

age: 44, wife - 41
kids: 4 and 2

No mortgage, car loans or credit card debt

Taxable - $400k
Current 401k - $325k
Current Roth IRA's - $285k
529's - $29k
Cash - $25k

The deposit from the sale will be around $1.25m. Similar to a lot of folks, we are planning and hoping to retire before social security age. My initial thought for the money is to send around $600k to a Traditional IRA and leave the remaining $625 in the 401k. I would then annually convert a portion of the Traditional to our Roth. If I understand the Roth ladder correctly, after the deposits have seasoned for 5 years, we can withdrawal the principal investment with no penalty or taxes. Is that correct?

We would use the taxable and Roth ladder to bridge the gap to social security (if it still exists) and the 401k money. Does this plan make sense? What else should I be considering? Any thoughts or insight would be greatly appreciated.

Thanks Bogleheads!
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David Jay
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Re: Company sold

Post by David Jay »

I would leave it all in the 401K. You appear to have no pre-tax IRA balances so you can convert $12,000 a year from taxable to Roth through the “backdoor Roth” process tax free. This is a much better plan at your stage of life.

I would not do any Roth conversions while still working due to your higher tax bracket. You can do Roth conversions after retirement when your tax bracket is lower. You already have $685,000 (and perhaps another decade of growth) that you can access for living expenses in early retirement between your taxable and Roth accounts.

[edit] If you retire so early that 1.1M (presumed growth of the $685K) is not enough for living expenses to get to 59.5, you can do a Roth conversion ladder in retirement to get more funds out of tax-deferred.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Company sold

Post by David Jay »

bmh33 wrote: Wed Jun 16, 2021 11:38 am3. Leave the money in the 401k for good.
Just a quick clarification, you do know that you are entitled to roll-over the entire 401K to a pre-tax traditional IRA upon separation from service, right? That is when one should set up a Roth conversion ladder.

In the meantime, read up on the backdoor Roth process, wiki here: https://www.bogleheads.org/wiki/Backdoor_Roth
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
chase_logi
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Re: Company sold

Post by chase_logi »

Side question, how can the proceed of sales be put into 401k, especially since it is way higher than the 19k/58k yearly limit of 401k contribution? Is it because the stocks were originally put into 401k directly during the vesting period at low valuation in the early years?
SubPar
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Re: Company sold

Post by SubPar »

I am also kind of confused by the proceeds going into a 401(k). I'd hazard a guess that you own the company shares via an ESOP?

[EDIT] Personally, I would leave in the 401(k) assuming decent investment options. Would prefer to keep out of T-IRA to avoid back door Roth complications. David Jay hit on the Roth conversion piece already.
Last edited by SubPar on Wed Jun 16, 2021 1:21 pm, edited 6 times in total.
vieques
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Re: Company sold

Post by vieques »

Having been through multiple M&A transactions, this is confusing to me. How are you getting the choice between these options? Usually, the only way to get private/illiquid stock into your 401(K) would be through a self-directed option which is not what the company would have provided. And, once it is in a tax-advantaged account, it is really hard to pull out without penalties. Finally, if your company is sold, how do you put highly appreciated shares into a 401K?
SubPar
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Re: Company sold

Post by SubPar »

vieques wrote: Wed Jun 16, 2021 12:59 pm Having been through multiple M&A transactions, this is confusing to me. How are you getting the choice between these options? Usually, the only way to get private/illiquid stock into your 401(K) would be through a self-directed option which is not what the company would have provided. And, once it is in a tax-advantaged account, it is really hard to pull out without penalties. Finally, if your company is sold, how do you put highly appreciated shares into a 401K?

An ESOP-owned S Corp, more than likely. The acquiring company is probably liquidating the Plan and merging into an existing 401(k). All the ESOP shares would've been granted pre-tax from the ESOP Trust, so this is the only scenario that makes sense...unless I am missing something.
Last edited by SubPar on Wed Jun 16, 2021 1:26 pm, edited 1 time in total.
Topic Author
bmh33
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Re: Company sold

Post by bmh33 »

Correct - we were an ESOP. The purchasing group (private equity) acquired our company plus two others to become one large organization. They will then sell us again in a few years.

I can't really speak to the reasoning behind the 401k deposit being the method of payment. I know that they struggled with that piece during negotiations and this method of transaction was deemed the easiest way to go.
vieques
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Re: Company sold

Post by vieques »

SubPar wrote: Wed Jun 16, 2021 1:19 pm
vieques wrote: Wed Jun 16, 2021 12:59 pm Having been through multiple M&A transactions, this is confusing to me. How are you getting the choice between these options? Usually, the only way to get private/illiquid stock into your 401(K) would be through a self-directed option which is not what the company would have provided. And, once it is in a tax-advantaged account, it is really hard to pull out without penalties. Finally, if your company is sold, how do you put highly appreciated shares into a 401K?

An ESOP-owned S Corp, more than likely. The acquiring company is probably liquidating the Plan and merging into an existing 401(k). All the ESOP shares would've been purchased by OP pre-tax from the ESOP Trust, so this is the only scenario that makes sense...unless I am missing something.
Ah, thank you for the explanation. I was assuming a C Corp here but this makes more sense. Also educational as I did not know that ESOP plans could be merged into a 401(K).
Topic Author
bmh33
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Re: Company sold

Post by bmh33 »

SubPar wrote: Wed Jun 16, 2021 1:19 pm
vieques wrote: Wed Jun 16, 2021 12:59 pm Having been through multiple M&A transactions, this is confusing to me. How are you getting the choice between these options? Usually, the only way to get private/illiquid stock into your 401(K) would be through a self-directed option which is not what the company would have provided. And, once it is in a tax-advantaged account, it is really hard to pull out without penalties. Finally, if your company is sold, how do you put highly appreciated shares into a 401K?

An ESOP-owned S Corp, more than likely. The acquiring company is probably liquidating the Plan and merging into an existing 401(k). All the ESOP shares would've been granted pre-tax from the ESOP Trust, so this is the only scenario that makes sense...unless I am missing something.
This is exactly correct.
alex_686
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Re: Company sold

Post by alex_686 »

Why leave it in the 401k?

Generally speaking, 401ks have limited fund choices and higher expenses than a individual IRA.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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David Jay
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Re: Company sold

Post by David Jay »

SubPar wrote: Wed Jun 16, 2021 1:19 pmAn ESOP-owned S Corp, more than likely. The acquiring company is probably liquidating the Plan and merging into an existing 401(k). All the ESOP shares would've been granted pre-tax from the ESOP Trust, so this is the only scenario that makes sense...unless I am missing something.
+1, I retired from a 100% ESOP company
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Company sold

Post by David Jay »

alex_686 wrote: Wed Jun 16, 2021 1:33 pm Why leave it in the 401k?

Generally speaking, 401ks have limited fund choices and higher expenses than a individual IRA.
For 10 years of backdoor Roth.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
123
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Re: Company sold

Post by 123 »

In my 401k all employer matches are paid in company stock(which I immediately diversify out of). The company stock is one of the 401k investment choices. So if my employer were acquired (unlikely) at a humongous premium (even more unlikely) the growth would be contained within the 401k for those that held shares there. For those that buy shares through a separate share-purchase plan their growth would be contained in the taxable share-purchase plan accounts.
The closest helping hand is at the end of your own arm.
alex_686
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Re: Company sold

Post by alex_686 »

David Jay wrote: Wed Jun 16, 2021 1:40 pm
alex_686 wrote: Wed Jun 16, 2021 1:33 pm Why leave it in the 401k?

Generally speaking, 401ks have limited fund choices and higher expenses than a individual IRA.
For 10 years of backdoor Roth.
I am missing something here. How does having funds in a 401k make it easier to do a backdoor Roth? I though you could only do it from a IRA.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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David Jay
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Re: Company sold

Post by David Jay »

alex_686 wrote: Wed Jun 16, 2021 3:26 pm
David Jay wrote: Wed Jun 16, 2021 1:40 pm
alex_686 wrote: Wed Jun 16, 2021 1:33 pm Why leave it in the 401k?

Generally speaking, 401ks have limited fund choices and higher expenses than a individual IRA.
For 10 years of backdoor Roth.
I am missing something here. How does having funds in a 401k make it easier to do a backdoor Roth? I though you could only do it from a IRA.
Any tax-deferred balance in any IRA invokes the "pro-rata" rule which makes a portion of any Roth conversion taxable.

Without a tax-deferred balance, they simply take $12,000 from taxable accounts, make a nondeductible $6000 contribution to their respective IRAs and immediately convert them to Roth with no taxes. If he moves $600,000 of tax-deferred into his IRA, "his" backdoor Roth conversion becomes 99% taxable (pro rata: 600,000/606,000).

[edit] Don't misunderstand, I am in favor of doing Roth conversions at retirement tax rates. I am just not in favor of doing Roth conversions at current (still working) tax rates. He can do a full rollover to tIRA at separation from service - which is when his opportunity to do IRA contributions will presumably end due to lack of qualifying "taxable compensation".
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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celia
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Re: Company sold

Post by celia »

alex_686 wrote: Wed Jun 16, 2021 3:26 pm I am missing something here. How does having funds in a 401k make it easier to do a backdoor Roth? I though you could only do it from a IRA.
Yes, a backdoor Roth starts in an IRA, but if you put this new payout in an IRA, the pro rata rule will apply when you do a backdoor Roth, so you wouldn't want all of that money in an IRA.

bmh33 wrote: Wed Jun 16, 2021 11:38 am3. Leave the money in the 401k for good.
Another option is to rollover some/all of it to an IRA when you are 59.5 which you can do, even if still at the same employer. But that sounds like a long time away for the OP and this money can easily double, maybe even double again, in that time.

I think I would hedge my bets to get a head start on Roth conversions and move $100K of the payout to an IRA and convert it over 4 years, while also doing backdoor Roths. OP needs to understand that most of each Roth conversion will be taxed, but some of it will be converted tax-free because the pro rata rule will apply to the Backdoor Roth being done each year.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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celia
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Re: Company sold

Post by celia »

bmh33 wrote: Wed Jun 16, 2021 11:38 am My initial thought for the money is to send around $600k to a Traditional IRA and leave the remaining $625 in the 401k. I would then annually convert a portion of the Traditional to our Roth. If I understand the Roth ladder correctly, after the deposits have seasoned for 5 years, we can withdrawal the principal investment with no penalty or taxes. Is that correct?
Just to clarify, the 401K and the IRA and a Roth IRA are individual accounts. Only the employee (the OP) can put some of his payout into his IRA and later convert it to his Roth IRA.

I can confirm that any money converted to Roth can be withdrawn after 5 years without any penalty. (Taxes were already paid on the converted amount for the year it was going into the Roth.) But the growth on that money can't be withdrawn until the Roth has been open 5 years AND the account owner is over 59.5. If either requirement is not met, the early withdrawal penalty is 5% of the amount withdrawn AND it will be taxed. You will have to keep your own records as to year and amount of contributions and withdrawals so you can calculate the potential penalty.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
JustGotScammed
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Re: Company sold

Post by JustGotScammed »

Let it ride in the 401(k). Put it 50/50 U.S. small-cap value and international small-cap value and you'll continue to dominate.
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btq96r
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Re: Company sold

Post by btq96r »

bmh33 wrote: Wed Jun 16, 2021 1:26 pm Correct - we were an ESOP. The purchasing group (private equity) acquired our company plus two others to become one large organization. They will then sell us again in a few years.

I can't really speak to the reasoning behind the 401k deposit being the method of payment. I know that they struggled with that piece during negotiations and this method of transaction was deemed the easiest way to go.
I had a friend a few months ago in a not dissimilar situation, she had a lower payout, but it was a good way for her to plus up her 401k after years of under funding it because she was paying off debt. The ESOP part isn't everyday common, but it's not out of the norm and structurally sound for these situations. If you like the 401k options, going that route seems pretty easy, and a great way to turbocharge your retirement savings to help you hit that goal.

After deciding how you want to handle the payout, you should check this isn't conditioned on your continuing tenure with the company, and if it is, understand any claw back provisions if you leave before a time window they put in. You might find having PE in the fold not something to your liking after 15 years of how things used to be, and want to jump ship if things get crappy. The fact that it's already knowledge you'll be sold again in a few years means the new large organization has an Embedded Growth Obligation (E.G.O.) to drive up EBITDA for the next sale. Not knowing your industry, maybe those targets will be achievable without too much turmoil. But mine own experience with this process has the E.G.O. well in mind during strategy planing and the decision making process.
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