I would move the funds out of company stock into a dated fund to diversify it more. The company would have some pretty good runs but then fall back and suffer some pretty strong losses. I would buy in when they were running then transfer out to another stronger fund when they are nosediving. It has worked well but I am curious if this hurts me long term in regards to losing any tax advantages when we start taking withdrawals in retirement?
Qualified plans and IRA’s are generally tax neutral to the owner. If the company stock is inside your 401(k) these transactions are, for the most part, non-taxable events. Taxes usually do not apply until you take distributions, which are taxed as current income.
You have either been fortunate or had special insight to be able to trade for and against your own company stock. Everyone is different, but as an advisor, I generally would not recommend that anyone hold a concentrated position in any one single company or sector. I would also suggest that you not invest in your own company inside of your company sponsored 401(k). An unexpected event could find you unemployed and with a 401(k) that was decimated because you did not react at the proper time.
You are basically riding momentum by switching in and out of your company's stock and into other funds. I don't know what those other funds are, but momentum is real and many practiced traders use this methodology. However, it is very risky and many investors get burned. Be wary of this strategy. Especially when market cycles change. You are market timing and don't begin to think that you are smarter than the market. Additionally, make sure that you completely comprehend that you are putting a significant part of your assets into this company and then back out of it. Regarding the tax consequences, when you take distributions form your retirement account, it is taxed as ordinary income. And yes, as Jeremy Shafer mentioned, there is the possibility of NUA. But, I'm wary to recommend putting a significant amount of assets into your company stock without knowing that company first. For my clients, I like to dig in and look at the company beforehand. Ryan Hughes
I remember talking to 2 prospects after Enron collapsed, they were following a similiar strategy and they lost most of their money. IF you think no one can take a company down watch the rogue trader. A single person took large bank on his own to be worthless in 2 days. The same could also happen to your company. There is also the risk the company may not like what you are doing and when the stock is nosediving they may let you go first. Can they fire you for selling stock, probably not. However, if they are going to layoff people you may find yourself in that list. The higher you move in the company you also risk of being charged with insider trading. Just because the 401k allows you to buy and sell does not mean you are exempt for insider trading rules. Depending on your industry your company is in, SEC can be very tough and unpredictable.
By diversifying away from a concentrated position in your company's stock, you are giving yourself a more balanced portfolio and over time you are giving yourself a better chance at an appropriate risk adjusted rate of return. As it pertains to your income withdrawals in retirement, you are eliminating your option to utilize Net Unrealized Appreciation (NUA) withdrawal at retirement. This is a very complex strategy but the important things to realize are that you have to have highly appreciated company stock in your 401(k) Plan for this strategy to make sense. You also need to have enough cash on hand to pay an additional income tax burden in the year you elect a NUA withdrawal. Also, you only have one option to process a NUA withdrawal in any Plan. If you separate from service and process any partial withdrawals, you negate your ability to use it. You should consult with a local advisor and CPA/tax attorney to get more information to determine if this is a strategy that you should utilize.
Good Luck! Mark
Trading in and out of the stock inside your 401(k) eliminates a powerful planning tool called Net Unrealized Appreciation (NUA). It allows favorable tax treatment of appreciated company stock rolled out of a 401(k). NUA is a complex deal that really won't fit neatly into a discussion board, but that's what you're missing out on.