Single stock dependence in Net Worth
48% of my family's net worth is in one stock (not PayPal). I know not ideal. Around $1.4M in a pre-tax 401K and $1.5M from ESPP and stock options. We never sold the stock over 20 years. Net worth: $6M I realize we need to diversify but at the same time don't want to pay an insane amount of taxes. Planning to sell the stocks in the 401K (not a taxable event) and reinvest the money in a fund to save on taxes using Net Unrealized Appreciation but waiting as current TC is too high and don't want to sell the stocks now. Planning to do it first year of retirement when we don't have any labor income. Any ways to minimize taxes if I sell the ESPP or exercise/sell the stock options? Is the best option to just do a little every year? Don't foresee any tax breaks from business, rental properties, etc. coming in the future for us.
How did you get $1.4MM in your 401k?You could execute an options strategy that puts a floor on your downside. However doing so will limit your net positive returns. FYI I don’t think having a concentrated portfolio is a bad thing. How do you think many of the richest people in the world got that way?
You are one #MeToo event with your CEO or perhaps a tweet against Trump from losing $1M. You should unwind those positions and target to have under 6-8% in a single stock. I’m assuming you already have a taxable income exceeding $200K per year so there is very little things you can do to time things. The only other thing you could do is gift it to a charity tax free. And all sales inside the 401K are tax free
Agreed. I might just sell a little ESPP and rebalance the 401K after rolling it over for the NUA tax benefits.
I do not like having my paycheck and savings from the same source. It is my own personal “Enron Rule”. I saw too many “millionaires” lose absolutely everything when that happened.
I assume it's a combined portfolio of your family. I think it will be better to start selling your espp before market crashes. You can do it in smaller amount every year.
that's what I was thinking
You need a reallocation strategy that takes all this into account. Call up your investment adviser ASAP.
The stock might double before crashing so you shouldn’t have the urgency to sell any of your stocks. No one can really predict the market. You can first diversify your 401k which has no tax consequences. There are very few ways you can avoid paying capital gains taxes. You can either donate highly appreciated stocks to charity, or you could hold onto the stock until your death and your heirs get a step-up basis.
NUA can save me few hundred thousand in taxes and I'm not able to do it with the original 401K provider. I need to transfer it to another provider or roll it over to my current 401k provider.
Roll it to an IRA. A 401K always has less flexibility than an IRA under your own control. You can do a rollover IRA with no tax consequences and then trade within it with no consequences.
TC and yoe OP?
combined TC: $600K YOE: 20
Better to seek advice from a financial advisor, not a place where blind lead the blind
First, like others have said, you should probably consult with a private wealth manager or banker about this. That said: I’m assuming your goal here is to hedge the downside risk of holding such a concentrated position while adding diversification to your portfolio and minimizing your tax consequences (importantly, that you are NOT looking to gain liquidity from the position). One way to achieve this goal would be hedge the position at its current price by purchasing at the money (ATM) put options and selling (or writing) ATM call options, then using the option premiums to invest in a diversified equity portfolio. Depending on your risk tolerance, you can adjust the strike prices of the put/call options to create an equity collar, which would provide you with more investable cash from the option premiums but would expose you to more risk from your consolidated position. Your tax consequences would be deferred until the options are actually executed, and are complicated because there are multiple tax scenarios depending on whether the options are exercised and how the underlying asset appreciates/depreciates during the option period (see this article for a more detailed breakdown https://www.investopedia.com/articles/active-trading/053115/tax-treatment-call-put-options.asp). That said, this strategy provides tax benefits because it allows you to defer your taxable event and will likely allow you to reduce your cost basis at that event. There are multiple other strategies, this is just to give you an idea of what PWMs can help you do with this type of position.
Awesome thanks so much for the detailed reply
Yeah if stock drops and you lose all gains, there will be less taxes to pay. Hope this helps.
It has ty