Taxes in Retirement: What ESOP Participants Need to Know

This article was originally published on Kiplinger on March 26, 2025.

When you retire, one of the biggest changes Employee Stock Ownership (ESOP) participants will face is how taxes are handled. During your working years, taxes are automatically withheld from your paycheck. In retirement, the responsibility to pay taxes shifts to you. 

Without proper planning, this change can lead to financial surprises. Let's explore how taxes work in retirement, the differences between account types, and how working with a financial adviser or CPA can help you create a tax-efficient withdrawal strategy.

Planning for taxes in retirement starts now. ESOP participants face big changes — avoid surprises with the right strategy and guidance.

The Shift: Paying Taxes on Your Own in Retirement

Once you retire, income sources like Social Security, pensions and withdrawals from retirement accounts replace your paycheck. Taxes are no longer automatically withheld (except for pensions and Social Security if you request it). This means you’ll need to estimate your tax liability and pay quarterly estimated taxes to the IRS. Failing to do so can lead to penalties and interest charges.

Understanding how your retirement accounts are taxed is key to avoiding surprises and keeping more of your hard-earned savings.

Taxable, Tax-Deferred, and Tax-Free Accounts

Retirement savings are typically held in three types of accounts, each with different tax implications:

1. Tax-Deferred Accounts. Examples are traditional IRAs, 401(k)s and Employee Stock Ownership Plans (ESOPs).

   • Contributions are made pre-tax, and earnings grow tax-deferred

   • Most ESOP participants will transfer company stock to an IRA beginning at age 55 through a process known as diversification.

   • Withdrawals are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73 or 75, depending on your age.

2. Taxable Accounts. An example is a brokerage account.

   • Contributions are made with after-tax dollars, and there are no tax benefits upfront

   • Earnings are subject to capital gains taxes (short-term or long-term, depending on how long assets are held)

3. Tax-Free Accounts. Examples are Roth IRAs and Roth 401(k)s.

   • Contributions are made with after-tax dollars, but withdrawals of earnings are tax-free if certain conditions are met

   • Roth accounts have no RMDs, making them excellent tools for tax-efficient planning

How a Financial Advisor or CPA Can Help

Navigating retirement taxes requires a strategic approach. A financial adviser or CPA can:

• Estimate Taxes: Help you calculate quarterly estimated payments and avoid penalties.

• ESOP diversification: Help you transfer company stock to your IRA where you will have a wide range of options including stocks, bonds, mutual funds or ETFs.

• Prioritize withdrawals: Advise on which accounts to draw from first to minimize your tax liability over the course of your retirement.

• Optimize Roth conversions: Suggest strategies to convert tax-deferred accounts to Roth accounts during low-income years. Typically between retirement date and age 73 when RMDs begin.

• Plan RMDs: Help you prepare for RMDs and minimize the tax impact.

Who Pays More Taxes in Retirement? A Simple Comparison

Imagine two retirees, each with $3 million saved, but in different types of accounts.

Retiree # 1: The Tax-Savvy Saver

• $1 million in Roth IRAs (grows tax-free, withdrawals are tax-free)

• $1 million in a taxable brokerage account (low capital gains taxes)

• $1 million in traditional IRAs/401(k)s (taxed as regular income when withdrawn)

Withdrawal Strategy:

1. Begin with taxable account withdrawals to take advantage of lower long-term capital gains rates.

2. Take modest withdrawals from tax-deferred accounts throughout retirement to reduce the size of future required minimum distributions (RMDs) and smooth out taxable income.

3. Supplement income from Roth accounts as needed to fill income gaps without pushing into higher tax brackets.

Tax Outcome: By staging withdrawals across all accounts, the retiree minimizes taxable income while proactively reducing RMDs. This approach also allows the Roth funds to continue growing tax-free for later years or tax-free for the next generation.

Retiree #2: The Traditional Saver 

• All $3 million is in a traditional IRAs/401(k)s (taxed as regular income when withdrawn)

Withdrawal Strategy:

1. Start withdrawals earlier than required to spread out tax liability and avoid large RMDs.

2. Consider partial Roth conversions during early retirement years when income is lower.

Tax Outcome:Without taxable or Roth accounts to offset tax-deferred withdrawals, the retiree will likely face higher taxes, especially after RMDs begin. Proactive planning can help reduce the long-term tax burden.

Total Tax Burden Analysis:

Age Range	Retiree #1 (Diversified Accounts)	Retiree #2 (All Traditional IRA)
62-72	Likely in 12%-22% brackets using brokerage & Roth IRA strategically.	Likely in 22%-24% brackets with all taxable income.
73-80	RMDs from only $1M Traditional IRA → Lower taxes.	Large RMDs from $3M Traditional IRA → Higher taxes (32%-37%).
Overall Impact	More tax-efficient, can avoid IRMAA surcharges, and maximize Roth benefits.	Higher tax burden, larger RMDs, and likely higher Medicare premiums.

Retiree #1 has significantly lower taxes across her lifetime due to diversified account types–especially tax-free Roth withdrawals. While retiree #2 pays more in taxes due to large RMDs beginning at age 73 and Medicare IRMAA surcharges in later years. 

Key Takeaways

• Retirement changes how taxes are paid, requiring careful planning.

• ESOP participants can continue tax deferral by transferring company stock to an IRA or 401k account.

• The type of account you hold — taxable, tax-deferred, or tax-free — affects your tax liability.

• A financial adviser or CPA can create a personalized strategy to estimate taxes and optimize withdrawals.

By working with a trusted adviser, you can reduce your tax burden, preserve your wealth, and enjoy a financially secure retirement.

Have questions about retirement tax planning? Contact Peak Wealth Planning to create a strategy that works for you.

Find out more about ESOPs by reading Peter’s six-part series about them on Kiplinger.com, starting with part one: Five Key Advantages to Working at an Employee-Owned Company.

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About the Author

Peter Newman is a Chartered Financial Advisor (CFA®) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.

Peak Wealth Planning offers personalized concierge services to meet your wealth management needs, including financial planning, investment management, ESOP diversification, retirement income, insurance, and estate planning. As a fee-based financial advisor based in Chicago, Peak Wealth Planning serves a select group of clients in Illinois and across other states.