INVEST ESOP DIVIDENDS INTO A 401(k)
An Employee Stock Ownership Plan (ESOP) allows workers to invest a percentage of income into their company. Most stocks produce quarterly dividends in the form of additional stock or cash. Cash dividends go directly to the employee and are taxed. Then, the employee has to decide whether to keep the money or reinvest it elsewhere. Finally, another haven is becoming available for dividend income.
ESOP participants may be able to invest dividends into their 401(k) plans. Under this scheme, employees build up retirement assets, defer taxes on dividend income, and can continue investing in their employer's company.
The U.S. tax code permits employers to deduct income tax from ESOP dividends from an employee's paycheck. Under the new proposal, an employee who wishes to defer taxes on ESOP dividends and build up retirement savings can invest his or her ESOP dividends in a 401(k) plan. Every dividend dollar going into the 401(k) lowers the employee's annual contribution directly from his or her salary to the 401(k).
An employer can save if it gives employees the option to invest 401(k) savings in its stock under a program called a (k)SOP. It pays less in taxes by placing more stock in its employees' 401(k) plan, can raise capital when it raises dividends (a higher dividend also makes the company more attractive to outside investors), and retains more of its income because dividends stay within the company instead of being transferred immediately to employees.