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Option #3 - Rolling your stock into an IRA - AND diversifying

Hopefully you've had a chance to read about Distribution Options #1 and #2. Now, let’s take a look at Option #3.

Like Option #1 (Rolling your stock into an IRA and holding), the first thing you’ll need is to find an IRA custodian that holds Publix stock.

in this situation, you’re planning to diversify your stock, which means you’ll need to sell it.  It’s important to sell the stock WHILE IT’S IN THE IRA AND NOT AS IT LEAVES THE PROFIT PLAN.

If you do sell it first and then roll the cash over into the IRA, it will work, but it’s going to be very confusing to your tax advisor when you provide your tax forms.  Because of this, it’s important to work only with a custodian that will take custody of your stock BEFORE you sell it, and then sell it back to Publix from inside the IRA. More on this later.

If you look back, you’re going to find Options #1 and #3 share many of the same advantages and disadvantages.  This is because you’re using an IRA in both cases.  The different pros and cons between the two are caused primarily by differences in the underlying investments – Publix stock in #1 and a diversified portfolio in #3.


What are the advantages of choosing Option #3?

First one is a double play - tax deferral on both the rollover and the potential gains in the portfolio. Once again, if you choose to roll your Publix stock into an IRA, you’ll avoid paying taxes on the shares and dividends until you take a distribution from the IRA. But in this case, since your plan is to sell the shares and diversify, you’ll also avoid the taxes on your capital gains you would normally pay if you sold the shares OUTSIDE of an IRA.

Once the individual investments are in place in your portfolio/account, there will be times when you will want to sell the investments that have done well and buy more of what haven’t.  This is known as rebalancing of investments. Because of the IRA, you’ll be able to do so without incurring tax liability.

Less “specific risk” -  The famous American Humorist, Will Rogers once said, "I'm not so much concerned about the return ON my investments as I am the return OF my investment". In a properly diversified portfolio, you should have anywhere from 5 to 50 holdings and depending on what type of investment vehicle you buy, you may have thousands of companies represented.  This eliminates something known as specific risk, which as its name implies, relates to risks that are very specific to a company or small group of companies.  Being too heavily invested in one type of investment or one company would represent a high level of “specific risk”.

Professional Management - Chances are, if you choose the option, you’ll need someone to professionally manage the IRA.  This can be done in a number of 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 would likely have recognized.

Your diversified portfolio can easily be converted into a steady, dependable stream of income - Income (dividends or capital gains) from an IRA can easily be deposited electronically into your bank account on a regular basis. 

IRA's are protected from creditors in Florida. However, this one is state specific, so depending on where you live, you’ll need to know whether they are protected or not.


Now for some disadvantages:

Higher taxes on your distributions - As I wrote in Option #1, 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 your tax liability will be higher on distributions from an IRA than if they were to come straight from the stock through selling shares along with the dividends.

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.

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, whether you diversify or not, you lose this tax advantage.

If the IRA is inherited by a non-spouse beneficiary, distributions may need to start in the first year - Again, straight forward. If your IRA is inherited by someone other than your spouse, they will be required to begin taking distributions immediately if you reach the age of Required Minimum Distributions (RMD’s).

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.

Required Minimum Distributions (RMD's) - Once the IRA holder reaches a certain age, 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.

Portfolio management fees and finding someone who can help - You’ll need to find a custodian that has the ability (and willingness) to transfer the shares into your IRA, then knows how to liquidate the shares (i.e. sell them back to Publix), then how to manage a portfolio well. 

As you can see, there’s a lot to think about with Option #3, and keep in mind, this is only 1 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 options to help you determine which is right for you. There are many factors to consider with each choice (depending on your personal situation), and we recommend you discuss them with us and a qualified tax and legal advisor before taking any distribution. 

If you would like to find out how we can help, please contact our office by phone or email. 

You can also schedule an introductory call with Mike by clicking here

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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.