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How You can Exit a Concentrated Company Stock Position · How to Retire on Time

• 0:00
  Mike: Hey. Thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look.
• 0:11
  David: Alright. Next question.
• 0:12
  Mike: Next question.
• 0:13
  David: How do I handle selling my company stock, which makes up over 50% of my savings? So
• 0:21
  Mike: if you've got a lot of concentration in stock, you're dealing with long term capital gains, Not necessarily income tax, which is one of the IRA assets the qualified retirement accounts have to deal with. Makes it a lot easier.
• 0:36
  David: So, yeah, this is maybe a better problem to have than if you had a huge four zero one k balance.
• 0:41
  Mike: Yep. Alright. Yep. So it you're either gonna pay 0% taxes on some assets, 15% on the gains of other assets, or 20%. All of that is underneath the 22% tax bracket.
• 0:56
  So that's a pretty good deal. Yeah. Now you've paid income tax to get here, so we don't wanna just arbitrarily make more tax problems. Tax problems, we wanna solve them. But you have a low basis, that means you purchased it at for a low amount and it's worth a lot more.
• 1:10
  So gains, the gains are getting in the way. So the first line of defense is called something it's something called dollar or direct indexing.
• 1:19
  David: Okay.
• 1:20
  Mike: Direct indexing is where you basically buy hundreds of stocks. Let's say let's say you're basing on the S and P 500. So you don't buy 500 stocks, you're buying 200 stocks.
• 1:31
  David: Mhmm.
• 1:32
  Mike: And the idea is each one of those 200 stocks has like a mirror company. A brother or sister kind of competition. So instead of you buying Coke, you bought Pepsi. Instead of you buying Allstate, you bought Progressive.
• 1:48
  David: Okay.
• 1:48
  Mike: They're enough in their industry. They're not gonna be perfect, but it's and so if if Coca Cola goes down, you sell it at a loss, and then you buy Pepsi. So you're not timing the market. You're just making subtle shifts of similar companies to generate losses as the overall portfolio tries to grow. Mhmm.
• 2:06
  That's it. So instead of buying the S and P five hundred as the ETF, you've bought the stocks within the ETF, you've gone direct to the index, and you're trying to harvest losses along the way. It works really well if you have a long term time horizon to get out of these companies, or out of the the cost basis that's there.
• 2:24
  David: Okay.
• 2:24
  Mike: Doesn't go forever though. Eventually markets rise. So the first year you might have reasonable amount of losses that you can realize. So you sell some of the company stock, and you offset your losses with the gains and so on, or the gains with the losses. So it's tax friendly.
• 2:41
  It's neutral. You're not paying taxes to get out of it. That's a pretty good situation.
• 2:47
  David: Yeah. So how do you start that then? So you have 50% of your portfolio has your company stock. Are you are you you're not selling that to buy into this direct indexing?
• 2:55
  Mike: You You have to sell, like, I don't know, 500,000.
• 2:57
  David: Oh, okay. So you would sell some of that company stock that you had and then buy all these other the 100 whatever, 100 plus positions and then let. And so are you are you having to go in like yourself and make all these transactions? Or can is there some automated way to
• 3:12
  Mike: do You typically hire someone to do this.
• 3:13
  David: Okay.
• 3:14
  Mike: It's anywhere from one and a half percent to point 2%.
• 3:17
  David: Mhmm.
• 3:17
  Mike: Just depends on who you go through and and what you know, like so we're flat fee advisors. We don't charge a percentage of the assets. But we we don't have the equipment to do this, and we're open about that. Yeah. So we have a deal it's like point 0.3% or something like that.
• 3:32
  Like very like it's their management fee. We don't have a markup on it because again, we're flat fee. Yeah. Just get you access to it. You get a very low low cost for them to do the work.
• 3:42
  Okay. But it's quite effective. Oh. So that's that's one way. So you sell some of it now.
• 3:47
  I like when you sell it in like January or February, and then move it in there. So the first year might be able to offset some of the gains of the transition into something like this.
• 3:56
  David: Okay.
• 3:56
  Mike: The other one is is if you're young enough, you can do direct indexing. Oh, not direct indexing. I'm I'm sorry. Index universal life insurance.
• 4:03
  David: Oh, an IUL. IUL. What do
• 4:05
  Mike: call it? The idea is if you need a death benefit, if you want a bond fund replacement with something that might have more cash growth potential. As long as it's funded correctly, when you sell stocks, maybe some of it was offset by the direct indexing, but you just wanted to hurry up the liquidation of your company stock. You could sell it and not pay the taxes from the sale, but pay the taxes from your funded IUL. Oh.
• 4:30
  Because you don't actually take money out of the IUL. You borrow against it. Oh. If you borrow against it, this is called positive arbitrage. Let's say you took $10,000, you borrowed against your policy, and there's a 4% well, I'm making up numbers here, but there's a 4% loan against it, but the policy is making 6% on average for growth.
• 4:52
  That means you're making a positive arbitrage or you're making 2% on money you've already spent.
• 4:57
  David: Oh, yeah.
• 4:57
  Mike: So that can absorb some of the long term tax consequences of something like this. Very sophisticated on what what needs to happen there. Mhmm. And then the last one is you could do things like qualified opportunity zones or a number of other potential strategies. But those are illiquid, more complicated, and so on.
• 5:17
  But the point being is there's a lot of ways to get out of a highly appreciated stock. Whether you bought Apple, Nvidia, Microsoft, Amazon
• 5:24
  David: Mhmm.
• 5:24
  Mike: Years ago.
• 5:25
  David: Yeah.
• 5:26
  Mike: Or you just worked for a company that gave you highly appreciated stock. There's different ways, and some people blend the strategies together. Some people will just pick one, maybe they'll do two. But there are better ways than just selling the money, paying the taxes, and moving on with your life.
• 5:43
  David: Okay.
• 5:44
  Mike: Now I wanna put one other thing in there. It's not just an exit. You need to know how to exit the highly appreciated stock, and where to go next.
• 5:55
  David: Oh, yeah.
• 5:56
  Mike: So for situations like this, you might not wanna go to annuity. If you take taxable money and put it into an annuity, then the gains are taxed as income, not capital gains.
• 6:09
  David: Oh, yeah. That's an annuity. Oh,
• 6:11
  Mike: yeah. Unless you want a guaranteed income for life, and you could set that up to be tax efficient for a lifetime income stream, that's fine.
• 6:16
  David: Mhmm.
• 6:16
  Mike: But if you're looking for a bond fund alternative, index universal life might be more tax efficient or buffered ETFs. Buffered ETFs are tax efficient because they're long term capital gains. What that means is, you need to know how you're exiting, and what you're entering into, and when you need those assets.
• 6:35
  David: Okay.
• 6:36
  Mike: It's the basis reset based on your plan and when you would need to tap into those funds. I mean, these are multi layered strategies where oftentimes people talk about one part. Hey, if you're tuning in and going, gosh, this makes sense or, you know, my adviser isn't talking like this way or, you know, I know there's something missing and I just don't know what it is, then there's a good chance it's time to get your one time plan. Go to retireontime.com today, click the button that says talk to a planner, and schedule your free thirty minute call where we're gonna ask you two simple questions. What do you want your retirement to look like, and what do you want from a financial professional like us?
• 7:14
  You dictate what you want, and then we will talk about what it's gonna take to get that to happen. Because our goal is to help you get what you want. Whatever that means. Tax planning, income planning, you name it, we help you get there because we're gonna teach you how to fish, not how to become codependent on an advisory relationship. Get a one time plan today.
• 7:32
  Retire on time.com. Click the button that says talk to a planner and schedule your free thirty minute call to learn more and explore those options.