Publix Associates - Your 4 Distribution Options
Because Publix is privately owned, there are some significant distribution and tax rules that can work in your favor IF you know how they work. By far, the question I get asked the most is “will you or can your firm hold Publix stock”? Well over 90% of the calls and emails I get are on this subject. So, I figured writing about it and providing the information to you would be helpful. So, before I get into the details of Option #1 , let’s briefly look at all your options. I to write in detail about the other 3 in the coming weeks, so look for more in the future.
A non-Publix retirement plan participant leaving an employer typically has four choices (and may engage in a combination of these options), each choice offering advantages and disadvantages.
1. Leave the money in his/her former employer’s plan, if permitted.
2. Roll over the assets to his/her new employer’s plan if one is available and rollovers are permitted.
3. Roll over to an IRA
4. Or Cash out the account value
But because of restrictions around Publix stock and your distribution options, for you it’s not quite that simple.
Option 1 – you ARE allowed to leave everything with Publix, but if you separate from the company prior to age 62, you can only leave it until the year after your 62nd birthday. If you’ve reached 62 when you separate, you’ll be required to take a full distribution the year following your separation.
Option 2 – doesn’t apply because no other employer retirement plans can hold Publix stock.
Option 3 – Applies fully
Option 4 – Applies fully
Again, in the future I’ll be offering several more articles that focus on the options that apply specifically to Publix and that we’ve been walking Publix Associates through since 1999.
For now, let's go deeper into Option #1 – Rolling your Publix stock into an IRA and keeping it in Publix stock (no diversification).
If you want to go this route, the first thing you’ll need is an IRA Custodian.
Unlike the Publix stock you may have bought on your own, IRAs require a custodian. To put is simply - if you want an IRA you need to have a custodian. A custodian is a company like the one’s we use – LPL Financial and TD Ameritrade, or Edward Jones, Merrill Lynch, Ameriprise, Schwab etc. These companies may or may not hold Publix stock in an IRA, but they certainly offer IRA’s and are regulated by the government to be qualified as a custodian. When they are functioning in this manner, they’re holding (or taking custody of) your stock.
If you aren’t sure what an IRA is, IRA stands for Individual Retirement Account. One thing people are can be confused about is thinking an IRA is type of investment. It is not, it’s a type of account. In the past, I’d sometimes get questions like “what do your IRA’s pay”. When I heard that, I knew in their mind they were thinking back when banks would advertise what their “IRAs paid” to entice you into their branch. However, even in that case, the IRA was still a type of account, and the underlying “investment” was likely a CD, Money Market, or something else. Many types of investments can be held in an IRA like mutual funds, stocks, bonds, cash, etc. But keep in mind, these are types of investments – the IRA is a type of account.
Perhaps the most attractive feature of an IRA is that it provides something called “tax-deferral”. Tax deferral means there are no taxes owed on any investment, or the growth of that investment - until it is distributed from the IRA. The advantage to this is that, since your money stays in the IRA, if there are gains, they can compound and can potentially provide you with an even larger account in the future.
They are also very popular for something known as a “rollover”. When you roll an asset over into an IRA, you keep the tax deferred status of that investment intact, allowing it to continue growing, until you eventually take it out. As a result, Publix Associates often look to this option to avoid taxes on their distribution. After all, no one wants to pay taxes if they don’t have to. But our government likes to take as well as give, and IRA’s can create larger tax burdens later in life. More on that below.
While I don’t believe “the tax tail should wag the dog”, many of the advantages and disadvantages of using this strategy are tax related. You should always discuss your distribution options with a tax professional that understands ESOP’s and Net Unrealized Appreciation (NUA) prior to taking your distribution.
Let’s get into the advantages of Option #1.
Advantage – tax deferral - Since I covered this above, there’s not much more to say other than if you choose to roll your Publix stock into an IRA, you’ll avoid paying taxes on the shares and dividends until your take a distribution. You’ll still receive any price changes in the stock and dividends; however, the dividends will go into the IRA (not directly to you) and would need to be distributed from the IRA if you need them.
Advantage – your Publix shares are protected from creditors in Florida when they're in an IRA. This one is state specific, so depending on where you live, you’ll need to know whether they are protected or not.
Advantage – allows for tax-free diversification and rebalancing of investments. If at some point you decide to sell all or a portion of your Publix stock, you’ll be able to do so with incurring a tax liability
Now for some disadvantages:
Disadvantage – higher taxes on your distributions.Since distributions from an IRA are taxed as ordinary income - which under current tax law is higher than taxes on capital gains - it’s likely you’ll owe more on these eventual distributions than if they were to come straight from the stock through selling shares and dividends. And regarding your dividends, if they come straight from Publix stock to you after you’ve taken the stock, they’ll be taxed at the lower capital gains rates. Same dividend, different taxation - simply because of where they’re coming from.
Disadvantage – potential 10% penalty on distributions prior to age 59½. This one is rather straight forward. Other than implementing a 72(t) arrangement with the IRS, any distribution prior to age 59½ will be subject to a 10% tax penalty of the amount withdrawn. There are exceptions such as disability and death, but chances are this will apply.
Disadvantage – forfeiture of NUA treatment on your gains.Net Unrealized Appreciation rules (NUA) provide significant tax advantages to the shares of any company stock distributed from a corporate retirement plan. In their literature, Publix even refers to this as “preferential tax treatment”. The bottom line is, if you roll your shares into an IRA, you lose this tax advantage.
Disadvantage – if inherited by a non-spouse beneficiary, distributions must start in the first year.Again, pretty straight forward. If your IRA is inherited by someone other than your spouse, they will be required to begin taking distributions immediately if you reached the age of Required Minimum Distributions (RMD’s) which is currently age 72.
Disadvantage – if inherited by a non-spouse beneficiary, account must be emptied within 10 years. Until 2021, if an IRA was inherited by a non-spouse, that person could stretch out their distributions over the lifetime. But the law was changed in 2021 and now the account must be emptied by the end of the 10th year after inheritance.
Disadvantage – Required Minimum Distributions at age 72.Once the IRA holder reaches age 72, they must begin taking distributions each year based on their life expectancy whether they need the money or not. Of course, when this happens, the IRS gets their share, which for large IRA’s, can be quite substantial. And if you don’t take the distributions on time, the penalties can also be substantial.
Disadvantage – you’ll need to find a custodian to hold the shares and pay custodial fees.This is becoming more difficult for Publix Associates each year. While there are many firms who will hold your Publix shares, there is no reason for them to do so, other than to collect a small custodial fee each year. Or in the case of a broker, trying to get you to sell the shares so they can invest your money in something else and earn a fee.
Unfortunately, there is simply no profit in a firm holding your shares, and there is also the responsibility that comes along with it. For example, Publix still issues physical, paper shares which cost money to overnight and keep safe as your custodian. Layer on top of that the fiduciary/best interest rules that now apply to IRA’s.
As you can see, there’s a lot to think about with Option #1 and keep in mind, this is only one choice out of 4.
The good news is we’re here to serve as a resource for your retirement distribution decisions and would be happy to discuss all 4 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 Henderson by visiting: https://go.oncehub.com/lifeafterpublix
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.
All investing involves risk including loss of principal.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Crossover Point Advisors, an SEC Registered Investment Advisor and separate entity from LPL Financial.