Legacy Planned Giving


Does Your 401(k) Hold Employer Stock? You Can Save Taxes, Receive Income, Reduce Risk, and Make a Gift

May 2015

Sometimes a company’s retirement plan—often a 401(k) profit-sharing plan—is heavily invested in the company’s own stock. That was unfortunate in the case of Enron, whose stock plummeted in value and destroyed the retirement security of many of its employees. However, in many instances company stock has proved to be an outstanding investment choice for its employees’ retirement funds, including significant tax savings. And you can receive even more benefits upon retirement—save more on taxes, receive retirement income, reduce risk, and make a future gift to our organization—by contributing the company shares to a charitable trust.

How to best benefit from significant appreciation in company stock

If you have a 401(k) holding your employer’s stock and it has appreciated significantly in value, you may have an excellent tax-saving opportunity when you retire or otherwise separate from service. That is to have your lump-sum distribution paid out in-kind with company stock rather than cash.

At the time of the distribution you will be taxed only on the purchase price of the stock, not its full value. The income gain in the stock is taxed later when you sell the stock—but it will be taxed at a lower rate than ordinary income.

Example: Suppose that you are aged 66 and planning to retire this year and that the market value of the company stock held in your account is $400,000 but the cost basis is only $40,000. At the time of the distribution you would include in your ordinary taxable income just $40,000. Later, when you sell shares to generate retirement income you will be taxed on the capital gain—but the federal tax rate on that gain might only be half of the ordinary income rate.

A distribution in-kind of your employer’s stock is a way to ensure a lower tax rate on part of the value. Thus you should inquire as to whether your company’s plan permits participants to elect to have lump-sum distributions paid out in the company’s stock—and if so, seriously consider doing this.

How to achieve additional tax savings, reduce risk, receive income, and make a gift

Although your employer’s stock may have performed very well in the past, there is a risk in continuing to hold too much stock in a single company that might suffer reverses. Diversification would mitigate that risk, but if you sold some of the stock distributed to you and invested in other securities, you would incur tax on the gain.

To reduce risk, save taxes, receive retirement income, and make a future gift to support our work, you could contribute the distributed shares to a charitable remainder unitrust. In the example described above, you would avoid taxation of $360,000 of capital gain and receive initial income of $20,000 per year (given a payout rate of 5%). You would also be entitled to a charitable deduction of approximately $185,000 (somewhat less if you and another person are beneficiaries) that can be used over a period of up to six years.

Your trust could sell some or all of the shares and create a diversified portfolio that reduces risk. The unitrust would pay no capital-gain tax upon this sale because it is tax-exempt.

Upon the termination of the unitrust, which would normally be at the end of your life (or upon the death of any surviving beneficiary you name), we would use the remaining assets for the purpose you have designated.

Possibly you would choose to divide the company shares, contributing some to the unitrust and retaining the rest. Because your gift would have generated a charitable deduction, you could sell shares you have retained and use the deduction to offset tax on the gain. You thereby retain personal capital to invest as you wish while at the same time creating a stream of income with the unitrust.

We would be pleased to answer your questions about this plan and to produce a financial illustration showing how it might work for your situation.

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