Broker Check

Option #2 - Taking Your Stock In-Kind - Publix Holds the Shares Electronically

Option 2 is one that Publix Associates tend to avoid (or may not consider at all), but taking your stock “in-kind” as a lump-sum distribution and NOT rolling the shares into an IRA certainly has its advantages ( and 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. 

 

First, let’s look at some of the disadvantages of Option #2 

No tax deferral - 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, but whenever there is a "realized gain" on an asset, that transaction potentially becomes taxable.

The shares are no longer protected from creditors - This one depends on the state in which you live, but in Florida for example, these shares would now be exposed to legal challenges.

Taxed when diversified - If you ever decided to sell the shares and diversify into another stock or type of investment, there would likely be taxes owed on the gains, i.e., no tax deferral.

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 have most, or maybe all of your investable asset in Publix alone, you are (by definition) taking more “specific risk”.  Specific risk is the risk of losing your entire investment.  Proper diversification helps avoid this.

You only have one investment option - Unless you're willing to undergo the pain of selling your shares and paying taxes, your entire financial future would be dependent on Publix.

Selling shares for income can be a pain - Because Publix no longer issues paper shares, selling them back to the company has become a bit trying, especially if you sell more than $10,000 at a time.

There's no one to guide you - Unless you're able to find an advisor where you can pay a fee to that is separate from the fees they would earn by investing your money, you’re essentially on your own. And unfortunately, 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. An advisor that will guide for a separate fee, either hourly or flat, can help you address these issues.

 

Now let’s look at some of the advantages 

Net Unrealized Appreciation - Holding your stock outside of an IRA will allow you to 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 (see disadvantage #1) may be lower than you think - Generally, 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 - Many people think you must not touch your retirement assets prior to age 59½. However, if you separate from service with Publix in the year you turn 55 or later, the 10% penalty on the cost basis is waived.

No Required Minimum Distributions (RMD’s) - This one is pretty straightforward, because the stock is not in an IRA, there are no Required Minimum Distributions.

No forced distributions when inherited by someone other than your spouse - Again, fairly simple, if a non-spouse inherits the shares, they would not be not forced to liquidate them within the next 10 years.

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 ($13.6 million per person in 2024), AND your State has no Estate Taxes, your heirs would be able to hold the shares, and continue to collect the dividends (assuming the dividend income continued). 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 - Your shares would be transferred to a non-retirement account and held electronically with Publix at no cost.

Lower taxes on your dividends - In this scenario, not only would you continue to receive your dividends, but they would now be eligible to be taxed at lower capital gains rates rather than ordinary income. Note: this is under current tax law and could change.

 

As you can see, there’s a lot to think about with Option #2 also, and keep in mind, this is only one option out of 4.

Also, 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.

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:

https://go.oncehub.com/lifeafterpublix

Which ever way you choose to connect, we look forward to hearing from you soon.