Employee Stock Ownership Plans and Profit-Sharing Plans

These plans, which let employees share in their companies' profits, have advantages and disadvantages.

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In an employee stock ownership plan (ESOP), employees buy stock in their company through payroll withholding or some other method, or the corporation contributes shares of its stock to funds that allocate the shares to employees based on their annual compensation.

Advantages. The advantage to employees is that they acquire stock of the company they work for at either no cost or reduced cost. Employees owe taxes on the value of the stock only when it is distributed to them. In the meantime, the stock can appreciate tax-free. And when employees take possession of the stock, they can continue the tax-favored treatment by rolling it over into an IRA.

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