Leaving Your Employer? What to Know Before Rolling Over Company Stock

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Unknown

if you work at a publicly traded company, you may have an overconcentration of your employer’s stock in your 401K plan.

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Unknown

There’s a unique rollover opportunity that may be available to you called Annual or net unrealized appreciation. Let’s chat.

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Unknown

My name is Gina DiGirolamo. I’m here today with Hayden KIbbey. This is a very relevant conversation for us as we actually just use the strategy with a recent client of ours.

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Unknown

That’s right. Yeah. Thanks, Gina, for having me on.

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Unknown

This is especially timely for us, I think.

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Unknown

Awesome. Well, as I mentioned, we’re going to be talking about annua, which is net unrealized appreciation. And if you could just kick this off and and share what that is and what it means.

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Unknown

Sure. So anyway, net unrealized appreciation is the gross above cost basis of company stock inside a retirement account like A401K?

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Unknown

And how would someone have company stock in there for one K in the first place? Yeah, I can get there in a couple of ways. Number one, oftentimes it comes as part of a company match or a profit sharing plan situation. We’re describing. That’s how this occurred. Also, there can be opportunities to purchase the company stock at discounted rates inside of for one case through an employee stock purchase plan.

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Unknown

We’ve seen that as well. So when this becomes really important is when someone separates from service. Yes from their employer. What should someone look out for or do if they want to elect a new way. Yeah. So I’ve seen a lot of times where HR department CPAs aren’t even familiar that this opportunity exists. So number one, very important to reach out to a trusted advisor in this case before you elect the roll over.

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Unknown

It’s key that this cannot happen after the rollover occurs. Rollover really is kind of a check the box thing when you leave a company. But it’s important to look into this first. What are some key tax rules when it comes to the company stock in the 41K. And how does this play out? If you were to give an example.

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Unknown

Sure. Happy to give an example on this. So let’s say that you had employer stock in your for one k worth $100,000 at a cost basis of ten, meaning you either purchase it at $10,000 or it was granted to you at $10,000, and now it has grown to 100. There’s two ways that it can play out. Once you separate from service.

00:02:23:07 – 00:02:52:04

Unknown

The first way is you can elect the rollover. And this is sort of the standard option. Everything inside that for one K is sold. The funds are rolled into an IRA. It’s deposited as a check. All the investments you have before are just invested as cash in the new IRA account. The alternative to that, if you elect any way, is you pay ordinary income tax in the year that you elect anyway on the basis on the 10,000 in this example, the remainder, the 90,000 growth goes into a brokerage account.

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Unknown

This is your normal after tax investing account. And you would have capital gains tax treatment on that remaining 90,000. You don’t have it in that year. You can elect to hold these shares until you’re ready to sell them. So you really only need to worry about the $10,000 in the particular year that you elect. So this is a very complex strategy, and it can be difficult to do.

00:03:13:17 – 00:03:39:01

Unknown

What mistakes have you seen, or would you tell someone to be aware of if this is applicable to them? There are a couple times where I’ve seen this not be a great opportunity. Number one, if the stock hasn’t appreciated significantly, it oftentimes makes sense just to elect a normal rollover. If you’re in a very, very high income tax bracket this year, because you have to elect to pay the income tax on basis this year, it may not make sense to do.

00:03:39:03 – 00:03:55:00

Unknown

And finally, and I think this is the one that key and people often miss is you end up having a concentrated position in whatever that stock was in your brokerage account. So you may not want to have a significant amount of your net worth in one employer stock after you separate from service.

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Unknown

So who could benefit from this opportunity?

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Unknown

The best opportunity to benefit from this is when you have a limited cost basis, and have seen significant appreciation since.

00:04:04:21 – 00:04:21:02

Unknown

Since you were granted the stock or purchased the stock. It also makes sense if you think you’re going to be in a high tax bracket in the future. So if these funds roll into an IRA, they’re still pretax. When you elect to take them out in the future, it’s ordinary income. With any way you’re electing to pay capital gains rates which are favorable.

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Unknown

So if you think you’ll be in a high tax bracket in the future and you’re have something to consider. Awesome. And to tie a bonus, if you were to give a key piece of advice or a key takeaway for anyone listening that, like we said, maybe at a publicly traded company and has this opportunity, what would that be?

00:04:37:14 – 00:04:59:21

Unknown

I would say number one, timing is key here, both on electing anyway before you roll it over because it can’t happen in the opposite. And also knowing the specific rules around when you’re allowed to elect anyway, there’s specific timing when you separate it from service, how long you have to elect this. So it’s key to work with a trusted CPA or financial advisor to make sure you understand the rules.

00:04:59:23 – 00:05:11:13

Unknown

great explanations. And just like you said, timing and working with a trusted professional is very important in this situation. So if this may be applicable to you, reach out to our team at blue Chip partners.

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Unknown

We’d be happy to help. And thank you so much for chatting today Hayden. Thank you. Appreciate it. Absolutely. And thanks for watching. Can’t wait to chat again soon.