Employee stock ownership plans (ESOPs) can be a good source of retirement income — here's what to know

When it comes to retirement plans offered by your employer, your first thought probably goes to 401(k)s. But if you happen to work for the right company, you may also be able to build your nest egg through an employee stock ownership plan (ESOP).

An ESOP is a tax-advantaged retirement plan where employees receive shares of the company's stock, usually at no cost to themselves. That means if the company does well in the stock market, employees participating in the ESOP benefit. What makes ESOPs particularly attractive to employees is that you don't typically have to contribute to the plan as you would with a 401(k) or IRA. Instead, the employer funds it.

"There's no financial commitment from employees [and] nothing really for employee[s] to think about," Lawrence Kaplan, founder and managing partner of CSG Partners, a firm specializing in ESOP transactions, tells CNBC Select.

Below, we break down more on how ESOPs work and whether they're a good tool to build wealth for the future.

For starters, not everyone will have access to an ESOP. You'll first need to check if your employer offers one; ESOPs are more commonly found in privately held companies than in public ones.

With those companies that do offer ESOPs, the company will sell a percentage of itself in shares (or the money to buy shares) to the ESOP, which is held in a trust on behalf of you, the employee. Your access to the company's full ESOP benefits and how many shares you receive as a part-owner, however, may depend on factors like your pay or how long you've been with the company. The shares you receive are also typically vested over a certain time period. Qualified employees can usually automatically opt-in and see their ownership shares.

Similar to a traditional 401(k), an ESOP is a tax-deferred account, meaning you typically don't pay taxes on the money earned from your ESOP until you take distributions. You'll pay a penalty with the IRS if you take distributions before the age of 59.5, except for any dividends the ESOP pays directly to participants.

If you have an ESOP and leave your company, you have three main options when it comes to the stock in your ESOP: sell the shares back to your employer, convert the ownership to cash or roll them into an IRA. Kaplan adds that younger employees prone to frequently switching jobs should think hard about walking away from an ESOP, as it's a major benefit for retirement planning.

An ESOP can provide a big boost to your retirement savings, but keep in mind its value is all tied to your company's stock. If your company goes bankrupt, you'll be wiped out, too.

For this reason, Kaplan suggests having an ESOP in place along with a 401(k) plan. This is also known as diversifying your retirement income. Some companies will offer both a 401(k) and an ESOP, with the 401(k) employer match going into the ESOP.

If your employer doesn't offer a 401(k), you still can open a traditional or Roth IRA to save for retirement on your own. With either type of IRA, you can put your cash into a range of investments, such as individual stocks, bonds, index funds, mutual funds and CDs. And just like with a 401(k), you can set up automatic contributions into your IRA from a checking or savings account.

Some of the big-name brokerages offer both traditional and Roth IRAs, such as Charles Schwab, Fidelity and Betterment.

ESOPs are employer-funded and tax-advantaged retirement plans that allow employees to have partial ownership of their company in the form of stock. Just make sure you also have in place a 401(k), traditional IRA or Roth IRA to cover all the retirement bases.

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