Why did Manifest flag my company stock?

Company Stock in Your 401(k): Rollover or Not?
Things get a bit more complicated when your 401(k) includes company stock. Here's why:
  • Vesting: You might not be fully vested in all your company stock. This means your former employer could reclaim some of it during the rollover.
  • Tax implications: Rolling over company stock can sometimes be less tax-efficient than other options.
Let's break it down with an example:
Imagine you have $150,000 worth of company stock in your 401(k):
  • $50,000 is your original cost basis (what you paid for it).
  • $100,000 is appreciation (the increase in value). This is also known as Net Unrealized Appreciation (NUA).
You have two main options:
  1. Sell your stock and roll over the cash:
    • Simple and straightforward.
    • You'll pay ordinary income tax on the entire $150,000 when you withdraw it in retirement.
  2. Transfer your stock to a taxable account, then roll over the rest:
    • You'll pay income tax and a 10% penalty on your cost basis ($50,000) now.
    • You'll only pay capital gains tax (typically lower than income tax) on the $100,000 appreciation when you eventually sell the stock.
Which is better?
It depends on your individual circumstances! Factors to consider include:
  • Your tax bracket now vs. in retirement.
  • How long you plan to hold the stock.
  • Your overall financial situation.

Scenario:
You have $150,000 worth of company stock: $50,000 that you originally were granted (your cost basis) and $100,000 of value due to appreciation. Wow, your company stock really made you a lot of money! If you choose to rollover your old 401(k), you have a couple of options with this stock:
  1. Sell your stock and rollover
    1. During your rollover, we liquidate your company stock and transfer the funds to your new provider. You do not pay any taxes on these funds now (there are no taxes with rollovers!), but when you retire and begin taking distributions, you pay ordinary income tax on the entire balance of $150,000.
      1. If you’re in the 32% tax bracket, you’d owe $48,000 in taxes.
  2. Transfer your stock to a different account, then rollover
    1. Rather than rolling over your company stock, you instead keep your shares and request they be transferred (a withdrawal) to a non-retirement account.
    2. You pay income tax and a 10% withdrawal penalty on your cost basis ($50,000), but pay no current taxes on your NUA ($100,000). When you decide to sell your company stock, you only pay capital gains taxes on your $100,000.
      1. Let’s keep you in the 32% tax bracket to illustrate this point.
      2. You’d owe 42% of your $50,000 (32% plus the 10% penalty), so $21,000 immediately.
      3. Your capital gains tax rate is 15% - which is another $15,000 when you sell your stock.
      4. That’s $36,000 overall - you’d save $12,000 on taxes using this option.
Need help deciding?
We recommend talking to a tax advisor to understand the potential tax implications and make an informed decision. If you decide to transfer your stock to a taxable account, you'll need to contact your old provider directly. We can't facilitate that specific transfer, but we're happy to assist you in any way we can!

The frequently asked questions, or FAQs, are intended to be helpful and to get you thinking in a more sophisticated manner about your account transfer and related issues. However, these are not meant for accounting, tax, finance, or legal advice, not intended to be exhaustive, and do not create any relationship or duty on our part to assist your particular situation. We offer no warranties on the accuracy or completeness of the information as there could be developments of any kinds, including, but not limited to, any changes in relevant laws and regulations.