Selling the Employer Stock All at Once
Sofia, age 58 and single, plans to retire at 60. Her $2.1 million portfolio includes $850,000 of employer stock with a $120,000 cost basis. Her salary and bonus are tied to the same company. She also has $50,000 cash, a $300,000 traditional IRA, and no debt. She is in the 32% federal bracket and subject to the 3.8% net investment income tax. Sofia wants to sell all the employer stock now because 'the market feels high,' pay the tax, and never look at it again. She also wants to leave $250,000 to a local community foundation at death and is willing to give some now.
1. Evaluate Sofia's concentration risk and her 'sell all now' plan.
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Sofia has about 40% of her portfolio in one stock, and her salary and bonus depend on the same company. That is double concentration: financial capital and human capital are correlated. A severe stock decline could hit her retirement date and her income at the same time.
But selling all now is also a decision with costs. The unrealized gain is about $730,000. Depending on her taxable income and the long-term capital gains rate, federal tax could be roughly 18.8% to 23.8% plus state tax-well over $130,000. Selling all reduces risk but converts a deferred tax liability into a current one and may push her into a higher capital gains bracket.
The plan should be judged by risk reduction, not by a market forecast. 'The market feels high' is not an investment policy. A staged sale over two to three years, with pre-set dates or price bands, can reduce concentration while managing tax brackets.
2. Recommend a diversification and charitable strategy that fits her goals.
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Consider a three-part approach:
- Staged sales: Sell a planned amount each year, monitor capital gains brackets, and use any available losses to offset gains. Avoid letting the tax tail wag the risk dog-if the position remains too large, sell more even at some tax cost.
- Charitable giving with low-basis shares: Sofia can donate appreciated employer stock to a donor-advised fund or directly to the community foundation. She avoids the capital gain and may deduct the fair market value, subject to the applicable percentage-of-AGI limits for appreciated long-term property. This also satisfies part of her $250,000 charitable intent now rather than only at death.
- Other diversification tools: An exchange fund or a charitable remainder trust may help in specific circumstances, but each has lockups, fees, or irrevocable tradeoffs. They are not automatic fixes.
She should coordinate the charitable gift with her estate plan so she does not duplicate the $250,000 bequest.
3. How should the planner address Sofia's market-timing comment?
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The comment reflects an affect heuristic: a feeling of 'high' is standing in for a risk assessment. The planner should not argue about whether the market is high. Instead, redirect to what is measurable: her 40% single-stock exposure, her retirement date, and her spending needs.
Use a written investment policy statement that sets a target concentration limit and a diversification schedule. Show her that if the stock falls 30% before she sells, the tax saving from waiting may be dwarfed by the loss. Conversely, show the tax cost of an immediate full sale. The goal is a planned reduction path she can follow in both up and down markets, not an all-or-nothing bet on a forecast.