How many taxes will I have to pay (ESOP)?

In 4 years I will receive an E.S.O.P. worth around 2 million dollars, I will be 45 years old, I plan on paying off my house I owe $447,000. I plan on rolling over the remainder to an IRA but I need to know how much to set aside or pay in taxes for penalties and taxes the next year. I know it will be a lot, also do I get any breaks for paying off an investment? I know this sounds crazy but I will be getting rid of a $2500 payment a month. I live in California.

I am serious about this, one of my ex co-worker who is getting his ESOP this year 3.5M went to a financial advisor, and thats the advice he gave him. He said he would be in a high tax bracket from his gains and his interest on his house will not be tax deductable anymore. I appreciate your advice

I am a financial advisor and I find it hard to believe that that advice was given.

Anyway, that strategy would put you in the top tax bracket for federal (35%), the top tax bracket for California (9.3%, or 10.3% if your gross income was over $1,000,000, which it could be), plus a 10% early distribution penalty for federal and a 2.5% early distribution penalty for California. Your taxes and penalties could total over 55 percent which would mean that it would take $1,000,000 of your $2,000,000 ESOP to pay off your $447,000 loan.

A much smarter plan would be to take a 72(t) distribution monthly to make the mortgage payment. You would avoid the 12.5% early distribution penalties and you would keep your income tax at a lower level. You might still have the $1,000,000 in tact after the house is paid off.

There is software available that would let you see an analysis of the results of doing it each way. If your co-worker has not yet taken that advice, I recommend that he get a second opinion.

I would highly recommend that you go to a professsional tax preparer or financial planner to do this. This is too much money to fool around with on a general tax forum on the internet.

You're saying all those crazy things just to get a reaction from us, right??? Why would you even consider taking your ESOP just to pay off a house? That doesn't make any sense. There is no financial, tax, or logical reason to do that.

But, if you're hell-bent on doing it, set aside about 50%
- you're going to be in the 35% tax bracket (higher than that if the Democrats win the Presidency/Congress).
- plus another 10% penalty on top of that.

You should come up with a Plan B.