8 Reasons to Sell Company Stock

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1. To satisfy other goals.

Your client’s stock-based compensation is just that, compensation. For many clients, there are a number of uses for this money other than holding these company shares as an investment. These could include college expenses for a child, paying down debt or investing the money elsewhere.

As with any compensation your client receives, encourage them to focus on the best use of this money to align with their overall financial and personal goals.

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2. Portfolio diversification.

As their advisor, you already counsel your clients on the benefits of a diversified portfolio. An excellent reason to consider selling some or all of the client’s company stock is to invest this money elsewhere. This might be into other investments in a taxable account.

One approach is to set a limit on the percentage of company stock in your client’s portfolio as part of their overall asset allocation. If they exceed this allocation, then shares should be sold to bring their allocation back in line. This approach is no different than you might take with any other holding in the client’s portfolio.

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3. Reducing a concentrated position.

Holding company stock over time can result in a concentrated position. Definitions vary, but a concentrated position is a single stock that comprises anywhere from 10% to 20% of your client’s investable assets. Beyond simply diversifying their overall portfolio, selling company shares under this scenario can help your clients reduce the risk of a major drawdown in the event of a steep decline in the price of their company shares.

For clients who routinely receive stock compensation, helping them avoid a concentrated position is an important task for you as their advisor. For new clients who may have accumulated a concentrated position in their company’s shares, helping them reduce this position is an important step in helping them manage their overall portfolio risk. In particular, this includes the risk of having both their main income source and a significant portion of their investment portfolio tied to the client’s employer.

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4. Maximizing retirement account contributions.

The proceeds from the sale of company stock can be directed to be sure your client is fully funding their retirement accounts. This can include maxing out their 401(k) contributions as well as contributing to an IRA, including a backdoor Roth conversion. Some of the money could also be directed to funding a spouse’s retirement accounts, if applicable.

If your client’s employer offers a deferred-compensation plan, funding their contributions can be a good use for some of the proceeds, as well.

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5. Funding a mega backdoor Roth.

If the client’s employer offers one, funding a mega backdoor Roth with after-tax contributions is an excellent use for some of the proceeds from the sale of company shares. A mega backdoor Roth allows for annual contributions as high as $43,500 for 2023, though this amount will be reduced by the amount of any company matching to the participant’s 401(k) accounts.

Depending upon the rules of the plan, your client may be able to do an in-plan conversion to a Roth 401(k), an in-service withdrawal to roll the after-tax funds to a Roth IRA or they may need to wait until they leave their employer to do a rollover/Roth conversion. Regardless, a mega backdoor Roth can be a solid way to accumulate money in a Roth account and to promote tax diversification for their retirement accounts, as well as their overall portfolio.

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6. Investing in an annuity.

Your client might direct some of the proceeds from selling company shares to invest in an annuity that aligns with their retirement planning strategy. There are a number of annuity options that you and your client can consider based on their situation.

An annuity can add a degree of stability to your client’s retirement income planning and complement assets in various retirement accounts, plus taxable investments including company shares they may retain.

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7. Charitable giving.

Though not a sale of the stock per se, giving appreciated company shares to a qualified charitable organization can offer a double benefit for clients who are charitably inclined. The value of the shares on the date they are donated represents the amount of their contribution. If your client can itemize, the amount of the donation serves as a tax deduction.

An additional benefit is that capital gains taxes do not need to be paid on appreciated shares that are gifted. Giving appreciated company shares can also be a tax-efficient strategy to help reduce your client’s allocation to company stock.

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8. Hedging.

One way to manage a company stock position is to use one of several hedging strategies on the shares. One strategy might involve your client purchasing a put option against some or all of the shares. This gives your client the right — but not the obligation — to sell the corresponding number of shares at the higher strike price if the shares decline in value within a specified time period.

A collar involves buying a put option on some or all of the shares and simultaneously selling a call option on the same shares. The put works in the same way as described above. The strike price on the call option is above the current price. Your client earns a premium from selling the call and will be required to deliver their shares if the share price exceeds the strike price, assuming the option holder exercises the option.

A caution, if either of these or other related strategies sound attractive, be sure your client checks with their company, as some employers may prohibit employees from using options strategies on shares within the company’s plan.

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