Sell company stock (taxes) or wait until early retirement (no or low taxes)

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SnowBog
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Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

I know the general rule of thumb here is to immediately sell company stock, and never let it be more than 5-10% of your assets.

Sadly, I didn't know that years ago... I've been selling all new shares since late 2018, but I have 5+ years of shares still sitting in my account.

While the % has been going down each year (since 2018), these company shares currently represent about 25% of my assets (not adjusting for any amounts also held as part of TSM, S&P500, etc.).

And I've been transferring appreciated shares to fund a UTMA earmarked for college (up to the kiddie tax limit). I don't currently have a DAF, but that's a future possibility as well.

The gains are about 2/3 of the holdings (so about 17% of my total assets), and between federal (20%), NIIT, and state taxes, I'd lose probably 30% or more of the gains to taxes (rough math 5-6% of my assets) if I were to liquidate them. Which would take me 2+ years to make up with new savings (forcing me to work longer).

If I had 20+ years to go, I'd think different...

But my delima is we are on track to be able to retire (or take less stress/lower pay jobs) within the next 10 years. Doing so would give us 10-15 years of little to no "income" (and thus taxes) before SS, pensions, etc. kick in. Those 10-15 years would give far more flexibility to tax efficiently deal with these (as well as look at Roth conversions, etc.), potentially paying a fraction of the taxes if pay now.

Additionally, based on planned savings rate (and subject to the market returns), I'm projected this holding to be less than 10% of my assets in the next 10 years or so. And with the SECURE Act changes (eliminating the "stretch" IRA option), if we have "more" than enough someday, since these would get "stepped up", our heirs would have no tax implications.

Lastly, were I to pass unexpectedly, that 5-6% of assets that would have been lost to taxes, would be saved (step up) - which "feels like" free extra life insurance (to go with other life insurance - my family will be fine...) right now.

FWIW I previously invested my own money in this company before I worked here, so the "would you buy the stock" test is "yes" (except now that I've found BH I don't buy individual stocks anymore).

I know there's no "right" answer...

If the stock implodes, I'll look back on this post and think "if only"... (But if it's part of a broader market decline, that could be a great way to limit the tax impact and rebalance to VTI....)

My current thinking is "don't just do something, stand there!"

What would you do?
treadingwater
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by treadingwater »

Try to ease out of it. I also didn't know any better when I was young. The company stock has lost half its value, and had I been in vtsax I would be in a much better position. Speaking from experience here.
Never panic. Stop looking so much.
GuySmiley
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by GuySmiley »

Went through a similar mental process last week, not at the scale of the OPs circumstances. Pros and cons with each approach. In the end, I decided to be a good Boglehead and sell the long-terms gains to diversify. Paying the tax for reduction of risk. Not sure it was the right move, but I can revisit the decision every six months or so as new shares become available. Once I get within a few years of retirement, my guess is I will be more inclined to hold the shares awhile longer and pay the tax in a lower bracket.
lakpr
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by lakpr »

How big is this company? Is it one of the FAANG companies? These are almost trillion dollar companies (well may be not Netflix), so it's not like they will go to zero is such a hurry that you don't have 10 more years. The value might fluctuate, yes, but unlikely to go to zero.

I would not add any more to the position, reinvest any dividends into broad market index, but I'd not sell.

Your plan of transferring appreciate shares to your kid, and selling them there (up to $1200 of unearned income in the name of kids is not taxable) is sound! It could help with gradual liquidation. Do the tax-gain harvesting in the UTMA account.

If your kid ends up in college and it's clear that he didn't get any financial aid (you are paying full fare), I think transferring a large chunk to your kid's account and then have him liquidate for tuition and living expenses .... he will file for that year or two as a non-dependent ... that could be another avenue to get rid of the stock.
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Stinky
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Stinky »

I’d say -

1. Sell all new shares

2. Set up a DAF with the most appreciated shares

3. Don’t reinvest any dividends

4. Set a goal to get down to X% of assets in company stock in Y years. (Example - 5% of assets in 5 years). That will allow you to unwind your position in an orderly way, while growing your other assets.
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beehivehave
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by beehivehave »

Not a good idea to have your financial eggs in one basket unless you are VERY confident - your job egg and your nest egg are linked to the company's fortunes.
Silver78
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Silver78 »

On 2/29/2000 we closed a transaction with a "reputable" publicly traded company. My ISOs were worth $2.7mm. All I had to do was exercise and hold them for a year for LTCG treatment. The stock was trading a $64 on 2/29/00. Things started to fall apart pretty quickly. When it gets back to $50 I will sell.... When it gets back to $40 I will sell... I finally sold at $12 per share. It kept falling to below $3 over the next two years.

The biggest single financial mistake of my life.
Lalamimi
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Lalamimi »

I was laid off 3/18, 6000 shares of company stock vested. I was too overwhelmed (my mom had just died, we had just bought a new house). Taxes! Large severance. Stock tanked, company was sold in Dec of 19. I lost over $150K. well I will have loss for the next 50 yrs. Too bad I am 66.
vanuber
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by vanuber »

I am in similar boat, trying to sell off ~ $350K of taxable gains to reinvest in VTSAX. My initial thought was to bite the bullet and take huge tax hit. After sitting with it for a few months and starting to sell off a few things, I am leaning toward stretching it out 3-5 years for the tax advantages - 1) not hitting the NIIT limit and 2) considering IRA contribution limits. I am also doing what I can pre-tax to lower my MAGI, such as employer retirement plan and HSA contributions.

Regarding buy/sell strategy, I have decided to sell some stock and buy VTSAX at the same time every month, making a lateral market move. The biggest chunk of stock I have is MSFT. I don't think this company is going anywhere in the next 5 years, which is one reason I am leaning toward drawing it out for the tax advantages. If we do encounter a market slump, I am hoping VTSAX and MSFT will experience similar share losses and the lateral market move will ease the pain.
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Watty
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Watty »

Some things you may be missing;

1) If you delay paying the capital gains then when you do take them the tax rate could be higher. We can't talk or speculate about politics here but you cannot be sure what the capital gains tax rate will be even in 2021.

2) If you delay taking the capital gains until you retire then
a) That could limit your ability to do Roth conversion is a low tax bracket.
b) If you need to keep your income low to get an ACA healthcare subsidy then the capital gains could be a problem.

3) You looked at what would happen if the stock tanks, but what if it doesn't? If it justs keeps up with an index fund then in ten years you could have a lot more capital gains to deal with. Once retired there would still be a lot of incentive to finally sell it then and there could be even more capital gains then.

If you sell it now, pay taxes, and then buy something like a total stock market index fund now then in ten years you would have little pressure to sell the total stock market index fund when you retire.
SnowBog wrote: Thu Jan 30, 2020 4:22 pm The gains are about 2/3 of the holdings (so about 17% of my total assets),
Some of the large companies have up to are two or three percent of some index funds. If the company is a large company then you could be getting closer to 20% of your total assets in that stock.

I would also think that being ten years from retirement that you would have at least 25% of your portfolio in bond and 75% in stocks.

Even at 17% of your total portfolio the percentage of stocks would be 17%/75%= 22.7% of your stocks. If it is a large company that is in the index funds then that could be more like 25% of your stocks.
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

lakpr wrote: Thu Jan 30, 2020 4:33 pm How big is this company? Is it one of the FAANG companies?

Not FAANG, but a major holding in TSM, so I hope it's unlikely to go to zero in 10 years.
lakpr wrote: Thu Jan 30, 2020 4:33 pm If your kid ends up in college and it's clear that he didn't get any financial aid (you are paying full fare), I think transferring a large chunk to your kid's account and then have him liquidate for tuition and living expenses .... he will file for that year or two as a non-dependent ... that could be another avenue to get rid of the stock.
Great idea!
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

Watty wrote: Thu Jan 30, 2020 10:36 pm 1) If you delay paying the capital gains then when you do take them the tax rate could be higher.
True. But If future rates are higher for having low/no income than my current rates near the top of the tax brackets, I'll have a bigger problem with my plan than this...
Watty wrote: Thu Jan 30, 2020 10:36 pm a) That could limit your ability to do Roth conversion is a low tax bracket.
I'm lucky to have access to both a Mega Backdoor and a regular Backdoor Roth (plus spouse), as well as an HSA I've been maxing out the last few years (and will continue for as long as possible). So we'll have a decent sized Roth holding. But I understand this will create a tradeoff, but also give more options (I think).

I'm also starting to grow Muni in taxable. This should help minimize taxable income (dividends) during these years, and let's me invest my Roth and Deferred more aggressively.
Watty wrote: Thu Jan 30, 2020 10:36 pm b) If you need to keep your income low to get an ACA healthcare subsidy then the capital gains could be a problem.
Definitely something I'll watch... But if benefits don't change, my spouse is eligible for medical coverage for family between retirement and Medicare.
Watty wrote: Thu Jan 30, 2020 10:36 pm 3) Once retired there would still be a lot of incentive to finally sell it then and there could be even more capital gains then.
True, but the same could be if I sold and bought VTI. Presumably it will have gains 10 years from now. While I'm more comfortable holding VTI indefinitely, I'd still want to minimize future taxes by looking to tax-gain harvest, do Roth conversions, etc. in those few "low income" years.
Watty wrote: Thu Jan 30, 2020 10:36 pm I would also think that being ten years from retirement that you would have at least 25% of your portfolio in bond and 75% in stocks.
My expected year end AA target is 65/35, slightly more conservative. In part to offset some of the highest risk/volatility of a concentrated position, and in part because I don't need to take extra risk with my current savings rate.
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

beehivehave wrote: Thu Jan 30, 2020 4:36 pm Not a good idea to have your financial eggs in one basket unless you are VERY confident - your job egg and your nest egg are linked to the company's fortunes.
My spouse has a very stable job with benefits, which helps. And I know my skills are easily transferrable to a new company, which also helps.

But I don't know that I'd have the same income or benefits (like Mega Roth, HSA, stock grants, etc.) at a new job, which is why I'm trying to save as much as possible to ideally get to the point where I don't need to save anything else (or move up the date we could quit working if we chose). If my math is right, that could be within the next 3-5 years. We'd still need to earn enough to cover expenses for another 5-7 years, but I feel like this gives me more options.

But the other posts about losing jobs, companies folding (and stock imploding), those are the things that make me stress over this...
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by jminv »

SnowBog wrote: Thu Jan 30, 2020 4:22 pm

The gains are about 2/3 of the holdings (so about 17% of my total assets), and between federal (20%), NIIT, and state taxes, I'd lose probably 30% or more of the gains to taxes (rough math 5-6% of my assets) if I were to liquidate them. Which would take me 2+ years to make up with new savings (forcing me to work longer).

But my delima is we are on track to be able to retire (or take less stress/lower pay jobs) within the next 10 years. Doing so would give us 10-15 years of little to no "income" (and thus taxes) before SS, pensions, etc. kick in. Those 10-15 years would give far more flexibility to tax efficiently deal with these (as well as look at Roth conversions, etc.), potentially paying a fraction of the taxes if pay now.

I know there's no "right" answer...

If the stock implodes, I'll look back on this post and think "if only"... (But if it's part of a broader market decline, that could be a great way to limit the tax impact and rebalance to VTI....)

My current thinking is "don't just do something, stand there!"

What would you do?
There's no way you can know what your company stock will do in the next 10 years. So 2 years extra work could conceivably turn into longer if you don't sell. At least you know what the tax implications would be now if you sold, ie, you could lock in the 2 years. The real risk is the company specific risk that could force you to work a lot more than 2 years if you hold on for the next 10 years and the stock implodes. Of course, there's also the 'risk' that the stock outperforms.

I probably would continue doing the UTMA route and not adding any additional to the holdings. But taxes shouldn't necessarily be the driving consideration either since the other way at looking at it is you'd still have 70% of your gains. People focus a lot on taxes as they view it as a loss and humans are very loss averse plus single stocks have some things in common with lotto tickets, ie, there's the possibility of having a huge winner and not just the market average. Have you looked at how your concentrated position would become less concentrated as you continue to diversify away through your savings? This could be reassuring, ie, drops to x% of net worth in year 2, year 3...year 10, holding current prices constant or assuming a realistic growth rate for the whole portfolio.
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alec
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by alec »

SnowBog wrote: Thu Jan 30, 2020 4:22 pm
What would you do?
To me there is a whole spectrum from selling nothing to selling all of it. For me, I’d probably take a middle path and plan to have less than 5% of my assets in company stock within 3-4 years, which probably means selling more each year than you currently are.

If the stock really outperforms, you still have some, but if the stock doesn’t, you still sold some more. Minimize regret, but be prepared for the stock to tank and your job to dry up.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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Watty
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Watty »

SnowBog wrote: Fri Jan 31, 2020 3:11 am My expected year end AA target is 65/35, slightly more conservative. In part to offset some of the highest risk/volatility of a concentrated position, and in part because I don't need to take extra risk with my current savings rate.
With a 65/35 asset allocation 17% of your total portfolio would put the that stock at 26% (17/65) of your stock holdings plus any additional stock in your index funds.

You can crunch the actual numbers but you should really sell off at least part of it even if you have to pay the taxes. Bringing it down to an arbitrary 20%(including what is in index funds) would be a nice round number if you can't bring yourself to sell off more of it.

At least sell off part of it.
Domadosolo
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Domadosolo »

@OP, Decide how much you would invest in your best competitor, if you had the cash. That is the magic number.
Retain that amount in your company's stock, because that is really how comfortable you are.
Sell the rest, pay the taxes, and invest in a portfolio you would rather be invested in. (stocks, ETFs, MF, Bonds, Cash, it doesn't matter... OK, it matters, but you get my point).
Don't let taxes drive your investment strategy, particularly when you want to diversify.
Holding for LTCG is not really a good strategy, because as a wise person told me "Nobody knows nothing".
Don't look back.... and congratulations !
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

jminv wrote: Fri Jan 31, 2020 5:38 am People focus a lot on taxes as they view it as a loss and humans are very loss averse plus single stocks have some things in common with lotto tickets, ie, there's the possibility of having a huge winner and not just the market average.
The loss piece is a great point. Oddly I lost several thousand in late 2018 will a 401k rollover that took longer than expected, but that didn't really bother me. But writting a check for underwitheld taxes in April for roughly the same amount was something I dreaded doing.
jminv wrote: Fri Jan 31, 2020 5:38 am Have you looked at how your concentrated position would become less concentrated as you continue to diversify away through your savings?
Ignoring market changes - it should be under 10% within the next 10 years, so decreasing by roughly 3% a year, based on new savings. That said, the stock has slightly outpaced the markets, so last year is was only 1-2% decrease.
alec wrote: Fri Jan 31, 2020 6:47 am To me there is a whole spectrum from selling nothing to selling all of it. For me, I’d probably take a middle path and plan to have less than 5% of my assets in company stock within 3-4 years, which probably means selling more each year than you currently are.
Great point - I don't have to think of this as "either" keep everything "or" sell everything! Just figure out an amount I'm willing to sell each year to decrease the concentration quicker.
Watty wrote: Fri Jan 31, 2020 9:44 am With a 65/35 asset allocation 17% of your total portfolio would put the that stock at 26% (17/65) of your stock holdings plus any additional stock in your index funds.
Enlightening perspective. My original post called out the gains as 17% and the total as 25%. But when I went to see how things are today, I realized that my 25% was actually based on year end projected balances. Currently these stocks are closer to 30%, but as you noted - when I break that down as a % of equities its closer to 46%. I hadn't thought about it in this context before...
Watty wrote: Fri Jan 31, 2020 9:44 am You can crunch the actual numbers but you should really sell off at least part of it even if you have to pay the taxes. Bringing it down to an arbitrary 20%(including what is in index funds) would be a nice round number if you can't bring yourself to sell off more of it.

At least sell off part of it.
Selling off at least a part of it is making more and more sense...
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

Thanks everyone for the feedback!

I don't think I can bring myself to sell everything, but Watty's post made me realize these are nearing 50% of my equity holdings - so I think its clear I need to do something...

My evolving thinking is selling off x% a year of my holdings, maybe something like 10% - 33%.

By "shares" I'd sell the most this year (let's say 20%), and potentially pay the least taxes (on lower gains). Next year I'd sell 20% of the remaining 80%, while the gains per share would be higher, with less shares sold the taxes may be roughly the same. Same the following year... I think this is helping me get past my mental block of "loss".

Gonna go think more on the % - and what to do with the funds.
  • My "plan" has been to move any new taxable to muni bonds - but this is more than I had anticipated adding this year... Need to confirm I could re-balance in deferred to keep my target AA. The bulk of my bonds are in an "old" 401k without a lot of great equity options.
  • Alternatively, I could add VTI (or similar) to taxable, but that would generate dividends. Arguably they are a wash (current stock has dividends), but I'm attempting to keep my "taxable" income minimal to give the most flexibility for Roth conversions/etc.
inbox788
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by inbox788 »

If you have a need for fixed income and a charitable desire, Pooled Income Funds and Charitable Remainder Trusts might be something to look into.

https://www.fidelitycharitable.org/guid ... funds.html

The tax deduction may be about the same as liquidating a third of the holdings, and the income stream may be more tax efficient. You're essentially trading less taxes for a charitable benefit, and might come out ahead doing so, depending on the particulars.
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by LilyFleur »

treadingwater wrote: Thu Jan 30, 2020 4:28 pm Try to ease out of it. I also didn't know any better when I was young. The company stock has lost half its value, and had I been in vtsax I would be in a much better position. Speaking from experience here.
It can go both ways.
But I think OP is asking all the right questions, and moving in a direction of selling it off gradually as he has stated seems like a prudent move.
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Watty
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by Watty »

SnowBog wrote: Fri Jan 31, 2020 11:36 pm My evolving thinking is selling off x% a year of my holdings, maybe something like 10% - 33%.

By "shares" I'd sell the most this year (let's say 20%), and potentially pay the least taxes (on lower gains). Next year I'd sell 20% of the remaining 80%, while the gains per share would be higher, with less shares sold the taxes may be roughly the same. Same the following year... I think this is helping me get past my mental block of "loss".
The stock could also be down 30% or more next year if there is a bear market.

I can't predict the future but with all the things going on with politics and the corona virus there are a lot of potential Black Swans out there. While the illnesses and deaths of the corona virus are terrible the economic impact of basically shutting down China, and possible other countries can be huge. Now is not a good time to not have a diversified portfolio.

It would be good to do some dummy tax returns to see the impact of the spreading the sale out over several years. For the federal long term capital gains tax it sounds unlikely that you would have any in the 0% or 20% tax bracket no matter when you realize them. If you pay 15% now or over several years when you pay them does not make a lot of difference. You would also want to look at things like state taxes, AMT, IRMAA, etc when you do your dummy tax returns but I would suspect that those might not change very much either.

Without crunching the numbers it does not sound like you would be getting paid much in tax savings for delaying the sale of the stock.

I really don't understand why you are talking about any "loss", so far you seem to have gotten really lucky because;
1) If you had sold them as you received them then you would have likely paid higher taxes before the 2017 tax cut.
3) The stock market is still near an all time high.
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SnowBog
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by SnowBog »

Watty wrote: Sat Feb 01, 2020 7:34 am I really don't understand why you are talking about any "loss", so far you seem to have gotten really lucky because;
1) If you had sold them as you received them then you would have likely paid higher taxes before the 2017 tax cut.
3) The stock market is still near an all time high.
For #1, if I sold them as I received them, I'd have paid minimal taxes (at least that's how it looks like 2019 worked). But the stock has grown faster than the overall market, so I'd have lost out on that growth. (I realize this is a "good problem", could have been the other way around).

But you are quite right, I find myself in a very fortunate position, so "loss" probably isn't the right word.

Perhaps I'm attempting to be more "tax-effectient" is a better way of saying it.

My income is potentially highly variable (but I've had several good years in a row).

In good years, I'm hitting the NIIT threshold, max state tax bracket, high federal brackets, etc. (I realize this too is a "good problem" to have.)

In a bad year, I could sell off more stock while I'm not in top tax brackets, and pay lower taxes. If the market implodes, I could sell and reinvest into TSM with far less taxes. And if I wait until retirement, I could sell with potentially no (or drastically less) taxes.

So my sense of "loss" is paying more in taxes than I'd otherwise have to pay.

But that thinking is ignoring the risk of having the highly concentrated positions I have. So I'm now convinced to do something about it.

While perhaps the right thing to do is sell it all and pay the taxes, I can't [currently] justify paying that much in taxes in a single year. I didn't get into this position overnight, I don't need to get out of this position overnight.

But I've warmed up to the idea of selling off a sizable percentage, paying those taxes, and then repeating in future years.

I did some tax estimates, and selling x% this year likely has taxes of $Y. Selling another x% next year has similar estimated taxes (more gains per share, but less shares since it was reduced the year before). And the year following looked similar.

If my stock continues to do well, this strategy will continue to take off a good chunk of those gains and let me diversify them better.

Ignoring market changes, that (and new contributions) should get me under 10% of holdings in a few years.

Yes my risk is higher until then... While I believe my company has many good years ahead of it, "nobody knows nothing..."

So my order has been placed to sell the first x%. I'll see next year if it worked out as expected.
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Re: Sell company stock (taxes) or wait until early retirement (no or low taxes)

Post by EfficientInvestor »

Have you considered buying put options and/or selling covered calls to lessen the blow in the event that the price of the shares drops? You could implement a collar strategy so that the premium you bring in from the call that you sell would pay for the premium of the put that you purchase. You would still have to pay taxes in the event that the options gain value, your shares get called away from you, or you put your shares to someone else, but the options would protect you against potential losses.

https://www.investopedia.com/terms/c/collar.asp
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