What’s the best way to handle company stock without getting killed by taxes?

Company stock, especially if it was awarded as part of a long term incentive package, can be a terrific way to build wealth. But it can be a double-edged sword, too. Over-concentration in a single stock probably represents one of the biggest mistakes we have seen retirees make. And when the stock is from the company where they built their career, they may have a strong emotional attachment that can cloud judgement. 

Such over-reliance and over-confidence can be nearly fatal to your retirement plans and dreams when an investor rides a single stock up, and then back down again (remember Enron and Worldcom?). 

I recently had a client with more than 50% of his net worth in his company stock. He understood this risk and wanted to enter retirement without staking his financial future on a single stock. So we put together a three-pronged plan:

  1. We sold some of the stock to create a portfolio that would be more diversified and produce better income. We spread out the sales over a period of time to reduce his taxes
  2. We used the stock with the lowest cost basis to fund charitable giving. This was important part of the legacy he wanted to leave.
  3. We retained a much smaller, more reasonable number of shares because he believed it might continue to appreciate. But, we agreed to watch it carefully and trigger additional sales if fundamentals changed.