Balancing liquidation of company stock (post-NUA) with Roth conversions

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Ron Scott
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Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by Ron Scott » Sat Sep 30, 2017 9:47 am

Recently retired and I'm faced with the proverbial "good problem to have"; ~$3.5M in company stock that I pulled from the KSOP in an NUA transaction, and the remaining $2.5M that I transferred from the 401K to an IRA. The company did great during my time there but I want to bring down my concentration in it to reduce risk now.

I don't "need" any of it and would like to manage it as tax efficiently as possible for the estate. I am 61 and will not hit the IRA or SS until 70. Before then, I'll have ~$280K in interest/dividends from taxable accounts, about half of which will come from Munis.

The way I look at it, to maximize tax-efficiency, I need to balance the drawdown of the company stock (all at cap gains) with the Roth conversions. And I have a 9-year horizon to complete the bulk of it.

Has anyone faced this situation? Any thoughts on how to start planning.

I will be meeting with my accountant and estate attorney in 4-6 weeks and would like to go in knowledgeable and with a good set of questions.

Thanks.

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WoodSpinner
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by WoodSpinner » Sat Sep 30, 2017 10:58 am

OP,

What I am planning to do is to contribute a significant portion each year of the NUA stock to a Doner Advised Fund (you need to check IRS rules for limits) and use that to fund my Charitable donations. This gives me the space I need for the Roth Conversions.

I have already rebalanced the non-NUA side out of my company stock since it no longer meets my Investment Policy Statement.

Thoughts? 8-)

Ron Scott
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by Ron Scott » Sat Sep 30, 2017 4:26 pm

WoodSpinner wrote:
Sat Sep 30, 2017 10:58 am
OP,

What I am planning to do is to contribute a significant portion each year of the NUA stock to a Doner Advised Fund (you need to check IRS rules for limits) and use that to fund my Charitable donations. This gives me the space I need for the Roth Conversions.
This is Plan B for me...and may move to Plan A if I can't generate some killer idea I haven't thought of yet. It is a really good use of the funds with a tax efficient kick.

I'm hoping to get my accountant to run a model with an optimal balancing approach. It probably won't be great though.

BigJohn
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by BigJohn » Mon Oct 02, 2017 7:39 am

I'm in a very similar situation. My Roth conversion economics worked out to show that I really had to choose between conversion and any substantial sale of NUA stock. As you said, it's a good problem to have but the LTCG component of the NUA stock is so large (~85% of the value) that any sale essentially reduces Roth conversion opportunity dollar-for-dollar. With no NUA sales, I think I can efficiently get about 50% of my tIRA assets converted to Roth which feels like a good plan basis. As a result, I had to make a choice between that plan and one in which I had less far less in Roth but was able to liquidated my NUA prior to age 70. The decision was not a no-brainer as I'd really like to eliminate the only single stock risk in my portfolio but I ultimately decided that I was better served by focusing on Roth conversions until age 70.

Like WoodSpinner, I do use the stock to fund all my charitable giving but via direct transfer of shares rather than a Donor Advised Fund. I am considering use of a Donor Advised Fund to accelerate the giving by moving multiple years of donations to that fund in one tax year.

livesoft
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by livesoft » Mon Oct 02, 2017 7:45 am

One way to go into your future meetings as a knowledgeable client is to fill out your tax returns yourself. Just use 2016 software to do samples of you 2017, 2018, 2019, 2020, and 2025 tax returns.
This signature message sponsored by sscritic: Learn to fish.

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FiveK
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by FiveK » Mon Oct 02, 2017 10:47 am

See Tax Strategy for Timing of Early Retirement with Significant Long-Term Capital Gains for similar discussion. One can make a good case for either realizing the LTCGs or doing the Roth conversions.

It may well be that a financial comparison of TGH vs. Roth conversion would favor the Roth conversion, assuming equal risks of the investments held in each and a sufficient elapsed time.

With so much unrealized LTCG held in one stock, favoring selling that stock and converting the proceeds to something (e.g., index funds) less risky is not at all unreasonable, even if that reduces the amount of tIRA->Roth you can do prior to RMDs and SS.

bsteiner
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Re: Balancing liquidation of company stock (post-NUA) with Roth conversions

Post by bsteiner » Mon Oct 02, 2017 10:52 am

In comparing rollover to NUA treatment, rollover now offers the possibility of a Roth conversion, which will usually add substantial value. So rollover is preferable to NUA treatment more often than it was before Roth conversions were available.

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