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Option #1 - Rolling your stock into an IRA and holding

By far, the question I get asked the most when a current or former Publix Associate calls my office is “can your firm hold Publix stock”?

The short answer is "yes", but my next question is "are you sure you want to"?

I believe they ask this question first because Publix Associates are under the impression they MUST roll their stock over into an IRA so they don't pay a boatload of taxes - and maybe some penalties - when they take distribution.

Because of rules surrounding the distribution of corporate stock from a retirement plan, there are some significant distribution and tax rules that can work in your favor IF you know how they work. With that in mind, here's some information I hope will be be helpful:


Before I get into the details of Option #1, let’s briefly look at ALL your options. 

Any retirement plan participant leaving an employer typically has four choices (and may engage in a combination of these options), with each choice offering advantages and disadvantages.

Options:

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. Take a full distribution either in-kind or in cash. 

NOTE: For Publix Associates, a full distribution would mean taking a distribution of your shares, - i.e., moving them out of the ESOP and 401(k) to another account - but not necessarily selling them. As an ex-associate, 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 of the stock the year following your separation.

But because of restrictions around Publix stock and your distribution options, for you it’s not quite that simple.


Here are the options specific to Publix:

1 - Rolling your Publix Stock into an IRA and keeping it in Publix stock. 

2 - Taking your stock as a certificate (in-kind) and holding it OUTSIDE OF AN IRA.

3 - Rolling your stock into an IRA and then selling and diversifying

4- Taking your stock as a certificate (in-kind), but then selling it, paying the taxes, and diversifying it into other investments

Unfortunately, rolling your stock into another employers plan isn't an options since no other companies will hold the stock.


Let's go deeper into Option #1 – Rolling your Publix stock into an IRA, keeping it in Publix stock, and NOT diversifying into anything else.

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 it simply - if you want an IRA you need to have a custodian. A custodian is a company like the 2 we use – LPL Financial and Charles Schwab. Other examples would be Edward Jones, Merrill Lynch, Morgan Stanley, Ameriprise, 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 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 to 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 potentially provide you with a larger account in the future because it eliminates "tax drag".

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. 

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 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.

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. 

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:

Higher taxes overall 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.

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 other exceptions such as disability and death, but keep in mind they are called exceptions for a reason.

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.

If the IRA is inherited by someone other than your spouse, distributions may need to start in the first year. 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 73.

If the IRA is inherited by someone other than your spouse, the account will need to be emptied within 10 years. Uncle Sam wants his money but until 2021, if an IRA was inherited by a non-spouse, that person could stretch out their distributions over their lifetime. But the law was changed in 2021 and now the account must be emptied by the end of the 10th year after inheritance by a non-spouse heir.

Required Minimum Distributions. These are known as RMD's. Currently, once the IRA holder reaches age 73, 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.

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 for the 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 option out of 4, But this information is not exhaustive. There are many things to consider with all 4 of your choices before you initiate your 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 4 options to help you determine which is right for you.