How Can You Make Withdrawals From ESOP Investments?

Before you can withdraw any of the money your company has placed in your ESOP account, you must be vested, or have worked for your company long enough to have earned the right to the money. ESOP plans can have either cliff vesting or graded vesting. Read your plan documents to determine its vesting schedule before trying to make a withdrawal. In cliff vesting, you are entitled to none of your employer's contributions in the early years but all of them after no more than three years. In a graded program, you will have a right to 20 percent after the second year and an additional 20 percent each year until you are fully vested after six years.

Even if you're vested, your ability to withdraw from your ESOP depends on whether you still work for the company, as well as your age. If you've left your employer, making a withdrawal is easier. You can opt to take it out immediately or roll it over into another retirement plan, such as an IRA. In fact, if you are younger than retirement age, your employer will begin distributing the money after six years automatically unless you tell it otherwise. The distribution can be in a lump sum or in installments; cash or shares. Unless your company is one of the rare ones to offer in-service distributions, you won't be able to cash in on your current employer's ESOP unless you've been there for at least 10 years and are older than 55.

If you need money and aren't able or don't want to take a full withdrawal, you may be able to borrow from it instead, depending upon your company's plan. You also may be able to withdraw dividends, or money earned by increases in stock prices, even if you can't withdraw the rest. To make a withdrawal or borrow money, contact your plan administrator at the phone number listed on your ESOP statements. You'll typically have to fill out certain forms and will receive a 1099 tax statement at the end of the year.

Because the contributions your employer made to your ESOP weren't taxed initially, you'll be hit with a tax bill when you make a withdrawal, unless you roll it over directly into another retirement account. If you're under 59 1/2, you might have to pay an additional 10 percent tax penalty. You can file for an exception if you've left the company and are at least 55. You may also receive a tax exception if you need the money to pay high medical bills or if you withdrew the money because a court order required you give it to your ex-spouse.