I have a 401K through my employer, a Fortune 500 energy company. Most of my allocation is in company stock, which is at an all-time high (for now). Although I’m invested in other funds provided by the company, I’m very over-weighted in company stock and I’d like to reallocate. Is there a particular strategy for this?
Should I sell positions that were bought years ago when the stock was much cheaper, or is it better to sell more recently-purchased stocks that were bought at high prices? Does it make any difference at all? I feel there’s a tax implication here, but I’m not sure what the best course is.
You have a huge portion of your financial future tied to you employer. First your paycheck. Probably some portion of your healthcare funding. And you also have added your retirement/investment portfolio.
I favor people who are more than 10 years from retirement having a large proportion of their funds in equities – and the S&P 500 is hard to beat over a 10 plus year period.
If you can move your allocation to the S&P500, I would do that. For future stock purchases do it yesterday. For existing positions, I suggest you start with your HR department and also speak to a financial advisor.
If the stock is in your name, taxable capital gains are real possibility. If the stocks are in an IRA, 401K or similar retirement program I suspect changing the holdings will not be a taxable event – if that is possible. For existing positions, move carefully. I have made two errors over the years - each was painful/uncomfortable experience.
It depends on how you set your portfolio allocations. Personally, I try not to have more than 10% of my total portfolio in any single stock because of single stock risk. Since your future employment also has some tie-in to your employer’s stock, you just need to recognize that allowing your employer’s stock to have a higher allocation in your overall portfolio, that particular stock is probably riskier than any other single stock.
Generally, what happens in the 401(k) stays in the 401(k). However, with company stock there is a special rule called “Net Unrealized Appreciation” (NUA) that allows you to distribute shares of the stock to a taxable account, pay ordinary income taxes on the original basis, and have capital gains taxed at long term rates based on the original basis. This will generally result in lower taxes being paid than if you had left the stock in the 401(k), as all 401(k) distributions are taxed at ordinary income rates. There are rules around this maneuver:
You must meet at least one trigger criteria of: death; disability; separation of service or reaching 59 1/2 before distributing the stock.
After reaching the trigger criteria, you cannot take any distributions from the 401(k) before doing the NUA distribution
The entire 401(k) must be fully distributed in the same calendar year you distribute the stock. The distribution can be a rollover into an IRA or other qualified retirement plan.
If the trigger event is separation of service and the separation occurs before the year you turn 55, you will owe early withdrawal penalties, in addition to the ordinary income tax, on the basis of the stock.
If you are interested in eventually doing a NUA distribution with some of your company stock in the 401(k), you probably want to keep the shares with the lowest basis in your 401(k), so that the taxes you end up paying will be less of the ordinary income taxes and more of the capital gains. I would also strongly suggest that you read this article that gives more details on exactly how to accomplish a NUA properly 401(k) Net Unrealized Appreciation (NUA) Rules And Caveats (kitces.com)
I would refer you to the title of this thread, which is: Tax Implications for reallocating a company 401k account? There is no need to contact HR or a financial advisor to sell an overallocated company stock position in a 401(k), nor are there any capital gains taxes that will be due, since within a 401(k), there are no tax events for selling positions to buy other positions.
Since the @pound5 already indicated that the stock is in the 401(k), there will not be a taxable event for selling the stock. That said, there are considerations on which lots to sell, if the 401(k) actually tracks the basis for individual lots, if @pound5 wants to use the NUA rule. (My 401(k) didn’t - it just tracked the overall average purchase price. If that’s the case, then @pound5 just needs to decide how much company stock they want to keep in their portfolio and sell appropriately.)
Follow AJ’s advice on this. Unless that 401k account is somehow tracking individual lots and you would benefit from the NUA rule, just execute the “reallocation” transaction through the 401k administrator website (i.e. Fidelity, Aon/Hewitt, ADP, whoever) to sell down your company stock and buy an S&P500 index fund or ETF (VBINX, SPY, VTI, etc.). Calling the 401K administrator for information should give you directionals, a financial rep is usually qualified to discuss; if the person you talk to isn’t, they’ll connect you with someone who is.