This is an option that Publix Associates tend to avoid or may not consider at all but taking your stock as an “in-kind” as a lump-sum distribution and NOT rolling the shares into an IRA certainly has its advantages, but there are some disadvantages too.
How it works – This option is by far the simplest to implement. You simply need to complete your retirement forms to indicate you want to take the shares in a lump-sum distribution in-kind. Publix will then move the shares from your Profit Plan (tax qualified) into a NON-qualified account with Publix and hold the shares in electronic form.
When that occurs, the shares essentially become just like shares you may have bought on your own. You will still receive your dividends (and currently they will be taxed at lower capital gains rates) - and you will receive any appreciation in the price of the shares like you did when they were in the Profit Plan. But, because they are no longer “qualified shares”, there are some disadvantages regarding taxes.
This is likely why many people avoid this option – because they don’t want to pay any taxes up-front on their distribution.
While this is true, these shares would now qualify for something known as Net Unrealized Appreciation or NUA Treatment. This can be a significant tax advantage that might make paying some taxes up-front more palatable. In another post I will explain how NUA works specifically for Publix Associates, but suffice it to say, the tax savings over your lifetime could be considerable.
Here are some of the advantages and disadvantages
of keeping your stock but NOT rolling the shares into an IRA.
First, let’s look at some of the DISADVANTAGES:
- A portion of your distribution will be taxable in the year it was received. The amount depends on the average purchase price of your shares over your time at Publix. This is known as the “cost basis”. If you simply keep your shares without selling any up-front, you’ll owe taxes on the cost basis, but not the whole thing.
- You may incur a 10% penalty on the cost basis – If you separate from service and take the distribution prior to the year in which you turn 55, the cost basis will likely be subject to the 10% early withdrawal penalty. There are exceptions, but they are exceptions.
- If you ever need or decide to sell shares, you may owe taxes on your gains. This depends on your overall tax bracket and how much you sell in a year.
- The shares are no longer protected from creditors. This is State specific, but in Florida for example, these shares would now be exposed to legal challenges.
- Taxed when diversified. If you ever decided to diversify into another stock or type of investment, there would likely be taxes owed on the gains.
- Taxed if rebalanced. If this new investment portfolio, again because there is no “tax-deferral” since the investments are not in an IRA, if you had realized gains in the portfolio and sold those securities, you would likely owe taxes on those gains.
- More Specific Risk – Because you potentially have most - or all - of your investable asset in Publix alone, you are (by definition) taking more “specific risk”.
- You only have one investment option - if you hold the stock
- Selling shares for income can be trying. Because Publix no longer issues paper shares, selling them back to the company has because a bit trying, especially if you sell more than $10,000 at a time.
- No advice. Because there is no advisor involved, you’re essentially on your own. But, there may be several other post-retirement planning issues you need to address before and during your retirement to give you a higher chance of experiencing a comfortable retirement.
Now let’s look at some of the ADVANTAGES:
- You retain your ability to take advantage of NUA treatment of your gains, potentially saving you and your heirs a substantial amount in taxes over the rest of your life and theirs. More on this at another time.
- The taxes owed on the cost basis (Disadvantage #1) may be lower than you think, wayGenerally, this applies to Associates who have longer tenure, i.e., the longer you’ve been with Publix, they greater the advantages of this strategy/option.
- 10% penalty may end at 55 instead of 59½. If you separate from service with Publix in the year you turn 55, the 10% penalty on the cost basis is waived.
- No Required Minimum Distributions (RMD’s) at 72. Because the stock is not in an IRA, there are no Required Minimum Distributions.
- No forced distributions when inherited by non-spouse heirs. Fairly simple, if a non-spouse inherits the shares, they are not forced to liquidate them over the next 10 years as is so with IRA’s.
- May pass initially tax free to heirs. Again, to contrast this with holding your shares in an IRA, if a non-spouse heir inherits and IRA, they must empty the account within 10 years, and pay taxes as Ordinary Income on the distribution. By passing on your shares outside of an IRA, your non-spouse heirs can simply hold the shares. And if you’re under the Federal Estate Tax thresholds (currently at $12 million per person), AND your State has no Estate Taxes, your heirs would be able to hold the shares, collect the dividends. Taxes would be due on the difference between what Publix/You paid for them and the price you sold them for.
- Publix currently holds the shares for free - and there is no IRA Custodian is needed.
As you can see, there is a lot to think about with this strategy, and my team and I have the tools to professionally analyze how this applies to your situation.
Please feel free to contact us if you would like to talk.