The Advantages and Disadvantages of:
Taking a lump-sum distribution of your Publix stock “in-kind” - NOT rolling the shares into an IRA - Selling your shares - and Diversifying
In my experience this Option is the least used of the 4, but in the interest of full disclosure (and my role as a fiduciary), I'm including it so you have a breakdown of all your choices.
There are many similarities between Option 2 and Option 4, the largest is that you're taking a full distribution of your stock and NOT rolling it into an IRA. But the biggest difference with Option 4 is selling all of your shares at once and diversifying into other investment vehicles outside of the tax protections of an IRA.
Like Option 2, the initial step in this option is relatively easy 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 this occurs, the shares become just like shares you may have bought on your own. However, IF you follow through with selling the shares outside of an IRA, the taxes will potentially be significantly higher than Option 2 where you hold the shares.
In this Option, you would incur both the taxes on the cost basis as ordinary income, AND capital gains taxes on the difference between the cost basis and the price when you sell the shares. In other words, you would be liable for taxes on the entire distribution within a year.
Note: If you would like to sell the shares immediately upon distribution, there is another form you’ll need to complete to exercise your “PUT” option. This is where you’re able to sell your shares (or PUT them) back to Publix as they leave the ESOP.
So, if you were to choose this option, this is what you’ve done.
- You’ve taken lump sum, in-kind distribution and Publix now holds your shares electronically.
- Next, you’ll need to sell the shares back to Publix.
- OR you’ve gone through the process of selling all your shares back to Publix using the PUT option.
- You now have the cash proceeds from the sale, and you need a place to deposit the check. This could be your bank or credit union, a brokerage account (non-IRA), real estate, another business, anything other than an IRA or 401(k)
Regardless of which type of account you choose, depositing this check into anything other than an IRA will result in the largest tax liability of your 4 Options.
Before going any further, it’s important to note that in this scenario, if you were to change your mind after selling your shares, you do have 60 days to deposit this check into an IRA and avoid the taxation of the entire amount. It’s also important to note, if you choose this option, you are not required to sell your shares (in which case you’re now using Option 2), and if you do sell them, you don’t have to do it all at once. You could sell a block of shares each year over time and spread out your tax liability. But again, you’re now actually executing Option 2 – Taking Your Shares in-kind and Holding them outside an IRA.
While I normally try to "not let the tax tail wag the dog", this choice is almost all about taxes. Why? Well, this Option is about taking the shares, selling them, and diversifying into something else – outside of an IRA. If you think about it, you have 2 other options that would reduce your initial tax liability, and 1 that would reduce your overall tax liability throughout retirement. Hence the unpopularity of this Option. So, let’s dig into some of the advantages and disadvantages of Option #4
No tax deferral – Your entire distribution (if the shares are sold), 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.”
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.
The proceeds from the sale are no longer protected from creditors - unless you invest the money in some sort of insurance based, tax sheltered investment - This one depends on the state in which you live, but in Florida for example, if the account was not an IRA, annuity, or life insurance, it could now be exposed to legal challenges.
Taxed when diversified – When you do sell the shares and diversify into another stock or type of investment, there would be taxes on the net gains, i.e., no tax deferral.
Taxed when rebalanced - Again because there is no “tax-deferral” since the investments are not in an IRA, if you had realized net gains in the portfolio from the sale those investments, you would owe taxes on those gains.
Selling shares can be a pain - Because Publix no longer issues paper shares, selling them back to the company has become a bit of a challenge, especially if you want to sell more than $10,000 worth at a time.
Fees – Depending on how you invest the proceeds, there may be fees to have the portfolio professionally managed.
Less Specific Risk – Believe it or not, because you’ve diversified into hundreds of companies other than Publix, you’ll have less risk.
Taxes on Net Unrealized Appreciation and your Cost Basis will likely be lower than taking the same amount from an IRA – Even though you’re taking large a tax hit right away, you still have the ability to take advantage of NUA treatment of your gains, but there is a major disadvantage - if the sale is executed all at once, a significant amount of your distribution would likely go to the IRS leaving you with less overall assets working for you. In other words, you’d pay taxes at a lower rate, but on significantly less money.
There may not be a 10% penalty - This depends on how old you were when you separated from the company. If you separate from service with Publix in the year you turn 55 or later, the 10% penalty on the cost basis is waived, and there’s never a penalty on the net unrealized appreciation.
No Required Minimum Distributions (RMD’s) starting at 73 - This one is straightforward, because the stock is not in an IRA, there are no Required Minimum Distributions (RMD’s).
No forced distributions when inherited by someone other than your spouse - If the account is not an IRA and is inherited by a non-spouse inherits, it would NOT fall under the 10-year rule for distributions, i.e., they would NOT be required to liquidate the account within 10 years.
May pass initially tax free to heirs - By passing on your investment assets outside of an IRA, your non-spouse heirs can simply continue managing the account however they want (unless it’s a Trust). If you’re under the Federal Estate Tax Exemption ($13.6 million per person in 2024), AND your State has no Estate Taxes, your heirs would be able to inherit the account tax free and obtain a “step-up in basis”.
No taxes on “Income in Respect to a Decedent” (IRD’s) – Assets inherited in IRA’s are subject to this tax, regardless of whether the size of the account falls under the Estate Tax Exemption or not, but if it’s outside of an IRA there are no IRD’s.
Lower taxes on your dividends – Depending on the investments you choose, your dividends may receive capital gains tax treatment - which is more favorable to ordinary income tax treatment.
Easily converted into income – Generally, in any type of securities-based investment portfolio, it is quite simple to have the income the portfolio generates (dividends and capital gains) sent to your bank via ACH.
Professional Management - Chances are, if you choose the option, you’ll need someone to professionally manage your IRA. This can be accomplished in several ways, but what I’ve found is, the larger the account, the less likely people try to manage it themselves.
The ability to take advantage of other market opportunities. When I left Publix in 1999, the stock had underperformed the broader market for a decade. But there were opportunities in places other than the grocery industry that an investment professional might have recognized.
As you can see, there’s much to think about with Option 4. Also, and keep in mind - this information is not exhaustive. There are multiple factors to consider with each choice (depending on your personal situation), and we recommend you discuss them with a qualified tax and legal advisor before taking any distribution.
The good news is we’re here to serve as a resource for your retirement distribution decisions and would be happy to discuss all options to help you determine which is right for you.
If you would like to discuss this further, please contact our office by phone or email.
You can also self-schedule a consultation with Mike by visiting:
Whichever way you choose to connect, we look forward to hearing from you soon.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Crossover Point Advisors does not provide legal, or tax advice and all decisions should be made only after consultation with a qualified tax and legal representative.
All investing involves risk including loss of principal.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, an SEC Registered Investment Advisor and separate entity from LPL Financial.