Managing Company Stock in Retirement

Company stock can be a powerful tool for building wealth and achieving financial independence. There are many different strategies for strategically managing company stock during your working career.

As retirement approaches, strategic planning for company stock becomes significantly more important. You may have many decisions to make in a limited time, and you don’t want to get it wrong.

Maybe the plan has been on “autopilot,” meaning you’ve been accumulating shares through work and then doing nothing with the stock. While that may have worked up to this point, now is the perfect time to develop a plan and be intentional with your stock.

This can vary for different individuals. I recently met with two clients approaching retirement and looking for strategies for their company stock. Both had worked for their company for a long time and had positive feelings. One didn’t feel the need to keep the company stock and was interested in strategies to diversify relatively quickly. The other client felt strongly about the company’s ongoing prospects and didn’t want to sell.

While these two clients may have slightly different goals, the process for developing a strategy will be similar in many ways.

Step 1 – Identify the Role of Company Stock, Your Resources, and Your Goals

The first step is to take inventory of all your resources. This includes company stock as well as retirement accounts (IRA, Roth IRA, 401k) and sources of income in retirement like Social Security and pensions.

This inventory will also include things like vested but unexercised stock options. If they have value, you may be required to exercise them before leaving your company or within a limited time of leaving. A strategy to address these issues and the impact of taxes will be necessary.

Once you have a complete picture of your resources and total needs, you can start thinking through strategies for the company stock, which can vary significantly for everyone. For example:

• Retiree 1: Jim determines he needs $3 million of investments to meet his goals. He has $3 million in total investments, which includes $1 million of company stock.
• Retiree 2: Jill determines she needs $3 million in investments to meet her goals. She has $8 million in total investments, including $3 million of company stock.

In the scenarios above, Jim and Jill both appear to have the same financial needs. Jim appears to need to be more deliberate about his company stock. Jill appears to have more flexibility with her company stock. She might be able to diversify at a slower pace and focus more on charity and estate planning goals with her company stock.

Risks of Concentrated or Company Stocks in Retirement

There’s a saying that concentration is the greatest way to build wealth and the greatest way to destroy wealth. Even for stocks of quite successful companies, the returns (positive or negative) in a single year are often much wider than the overall market.

Narrowing the range of outcomes becomes much more important in retirement. A large downturn when retired creates a greater risk of running out of money and being unable to meet goals than a similar downturn when working.

How Do I Sell My Company Stock?

One final note when assessing your resources: Individuals accumulating stock without ever selling it may need to determine how to sell their company stock. This can include identifying blackout windows the employee needs to work around because the employee has material information. It also includes working with clients to identify specific shares to sell that will result in more or less realized gains than other shares of the same stock.

We work with clients to sell stocks as efficiently as possible.

Step 2 – Tax Strategies and Key Factors for Effective Diversification

Now that we have a clear picture of our investment resources and our need for those resources, we can start developing strategies that are mindful of taxes and other factors. For various reasons, we may want to increase taxable income, limit taxable income, or consider other factors when diversifying.

Intentionally Increasing Income

Early retirement may be a perfect time to realize capital gains while in a lower tax bracket. You may have been in a high tax bracket while working. Depending on the mix of assets, you may have little or no tax liability despite maintaining a comfortable cost of living.

When in a low tax bracket, we can intentionally realize capital gains. Depending on other income, a married couple might be able to pay a 0% tax rate on $100k+ of realized long-term capital gains. Even at higher income levels, long-term capital gains will generally be taxed at lower rates than other income.

Avoiding Higher Income

At the same time, there are reasons we may want to temporarily avoid realizing capital gains above a certain limit. This can include reducing income to maintain subsidies on health insurance (before Medicare starts at age 65), minimizing additional IRMAA premiums on Medicare, or other factors like Washington’s state capital gains tax above $250,000.

Other Considerations

Company stock can create other considerations, such as how to handle net unrealized appreciation (NUA) of company stock in a 401k. Also, decisions about when to begin Social Security and the start of required minimum distributions (RMDs) at age 73 will impact the strategy earlier in retirement.

Step 3 – Legacy Planning for Family and Charity

Once a strategy for short-term tax planning early in retirement has been developed and executed, there may be an opportunity to consider long-term planning. The scenario above with Jill is a perfect example. She has more resources than she “needs” to meet her goals, so she can think through other strategies for the company stock.

Lifetime Gifting to Family Members (Reducing Future Estate Tax)

Jill could gift assets during her lifetime to minimize estate tax when she dies. Currently, the Federal estate tax exemption threshold is $13.61 million, so Jill would likely not owe Federal estate tax. However, that is scheduled to be reduced to about $6 million in 2026, creating a potential estate tax for Jill.

If she is in Washington, a state estate tax on assets above $2.193 million would also affect her.

In 2024, she could gift up to $18,000 to as many people as she would like without any type of reporting. (If she gifted to eight people, she could gift $144,000 annually.)

She could also gift above that to support medical or education costs without needing to do additional reporting. All of these can reduce the ultimate estate tax bill.

Saving for the Step Up in Cost Basis

If Jill’s $3 million of company stock were purchased for $100,000, it would result in $2.9 million of capital gain income when sold.

If Jill was still holding that stock when she died, it would likely qualify for a step up in cost basis. Here, beneficiaries would inherit the stock as if it had been purchased for $3 million, and the $2.9 million of potential taxable income would just disappear.

Gifting to Charity

Gifting to charity has significant tax benefits. Low-cost basis stock can be directly gifted to charity or gifted to a donor-advised fund (DAF) before being given to charity.

For those who are 70 ½ years old, qualified charitable distributions (QCDs) from a retirement account can be used to reduce the taxable income from required minimum distributions.

There are also significant estate planning considerations when determining which assets will ultimately go to charities and which will go to family members or other individuals.

How a Merriman Advisor Can Support This Transition and Help You Live Fully!

These points only scratch the surface of what an individual should consider when determining what to do with company stock. Our recent webinar on planning with concentrated stocks covered this topic in more detail.

A Merriman advisor can help review your specific circumstances and determine appropriate adjustments to make. Why not book a FREE 15-minute consultation and chat with us to get your questions answered? Or, perhaps you prefer to take our Blindspots Quiz to see where you may be missing key elements to your financial profile. Either way, we are here to help and advise so please reach out!

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.