Why did Manifest flag my company stock?

We flag company stock on your old 401(k) for two reasons:

1. It may not be fully vested.
When we initiate a rollover and liquidate your company stock, your total account balance may fall as your former employer recovers the non-vested funds. There is no way to avoid this “penalty” - it will either happen during your rollover or occur at retirement age. We want to make you aware of this, so that it isn’t a surprise to see your non-vested funds returned to your old employer.
2. It may not be in your best interest to roll it over.
An additional consideration is that it may not be in your best interest to rollover your company stock, especially if your stock has appreciated (grown in value) considerably. This is due to specific tax rules and “loopholes” - we explain in a quick scenario below.
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 (also known as net unrealized appreciation, or NUA). 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
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.
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
Rather than rolling over your company stock, you instead keep your shares and request they be transferred (a withdrawal) to a non-retirement account. 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 NUA.
Let’s keep you in the 32% tax bracket to illustrate this point. You’d owe 42% of your $50,000 (32% plus the 10% penalty), so $21,000 immediately. Your capital gains tax rate is 15% - which is another $15,000 when you sell your stock.
That’s $36,000 overall - you’d save $12,000 on taxes using this option.
Of course, one size does not fit all. Consider your personal financial situation carefully before making a decision on your company stock. If you decide to take Option 2, you’ll have to reach out to your old provider personally and ask for this action. Manifest doesn’t support transfers to non-retirement accounts, but reach out to support@usemanifest.com and we’ll do our best to assist you.
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.