Retirement planning can be complex, especially for those whose retirement relies on funding from company stock through shared purchase plans and other employer-sponsored programs. As a tax-focused financial planning firm, we understand the unique challenges retirees face in this area and how they can best design their retirement plan to account for the nuances of stock plans. Here are some key strategies to consider.
1. Understanding Net Unrealized Appreciation (NUA)
A primary strategy we often recommend for clients with stock plans is called Net Unrealized Appreciation (NUA), which is a tax tool that can significantly benefit those with company stock in their retirement plans. NUA allows you to pay lower capital gains taxes on the appreciation of your company stock, rather than the higher ordinary income tax rates. This can be particularly advantageous during the "income gap" years, when your income may be lower before Social Security and other income sources kick in. We can help you maximize the benefits of NUA.
2. Managing Taxes on NUA
One of the most common concerns among retirees with company stock is the tax implications of NUA. When you take a lump-sum distribution of your company stock, you pay ordinary income tax on the cost basis of the stock, but the NUA portion is taxed at the lower long-term capital gains rate when you sell the stock. With our roots as an accounting firm with multiple CPAs on staff, we can help you manage these taxes effectively by employing key strategies that help reduce your overall tax liability.
3. Diversifying Your Portfolio
Holding a significant portion of your net worth in company stock can expose you to market volatility. Diversification is one of the keys to managing this risk. We suggest working with an advisor and considering gradually selling your stock and reinvesting the proceeds into a diversified portfolio that aligns with your risk tolerance and retirement goals. Gradually selling will help mitigate the risk of selling at a low point and can allow you to roll those funds into other options.
4. Planning for a Longer Retirement
Some workers with stock may retire younger than average, which means they need to plan for a longer retirement period. This requires a robust strategy to ensure your savings last. Consider diversifying your investments and creating a withdrawal plan that balances growth and income, and that takes into consideration the ages at which you may have more income sources (Social Security) or withdrawal requirements (Required Minimum Distributions). When we help clients plan for retirement, we regularly review and adjust their plans to account for changes in the market and your personal circumstances.
5. Regularly Reviewing Your Retirement Plan
Retirement planning is an ongoing process rather than something you “set and forget.” Regularly review your retirement plan to ensure it remains aligned with your goals, market conditions, and desired age of retirement. This includes reassessing your stock, NUA strategy, and overall investment portfolio. At Aliciene Tax & Financial Solutions, we regularly check in with you and discuss your overall plan to make sure we stay on track.
Planning for retirement can feel less intimidating by working with a tax-focused financial advisor who understands and addresses the complexities of stock-heavy retirement benefits. No matter your life stage, we are here to help if you have any questions or need personalized retirement advice. Feel free to reach out to schedule a time to meet.
Asset allocation does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.