Managing a Concentrated Stock Position
Concentrated positions can develop in different ways. You may have accumulated shares through equity compensation or an employee stock plan, received stock through an inheritance, retained shares following the sale of a business, or simply owned a successful investment for many years.
The challenge is often deciding what to do next.
Selling a large position all at once may create a substantial tax liability. Continuing to hold it leaves more of your wealth dependent on a single company. For some investors, charitable intentions, retirement timing, or the way employer stock is held can create additional planning opportunities.
We help you understand these choices before shares are sold or transferred.
What We Evaluate
Depending on your circumstances, concentrated stock planning may include:
- Measuring the position as a percentage of your investment portfolio and overall net worth
- Evaluating the investment risk associated with continued concentration
- Reviewing cost basis and unrealized capital gains
- Modeling the potential tax impact of selling shares over different time periods
- Developing a plan for gradually diversifying a concentrated position
- Coordinating stock sales with retirement income and cash flow needs
- Evaluating gifts of appreciated stock to charities or donor-advised funds
- Reviewing whether Net Unrealized Appreciation (NUA) treatment may be available for employer stock held in a qualified retirement plan
- Considering how the position affects estate and legacy planning
- Investing proceeds in a manner consistent with your broader portfolio and financial plan
The appropriate strategy depends on the stock, how it is owned, your tax situation, your time horizon, and the role the position plays in your financial life.
Charitable Giving With Appreciated Stock
If charitable giving is already part of your plan, appreciated stock may be worth considering as a source for those gifts.
Rather than selling appreciated shares and donating the resulting cash, an investor may be able to contribute eligible appreciated securities directly to a qualified charitable organization or donor-advised fund.
Depending on the circumstances, this can allow the donor to avoid realizing the capital gain that would have resulted from a sale. A charitable deduction may also be available, subject to applicable tax rules, holding periods, adjusted gross income limitations, and other requirements.
For investors with a concentrated position, charitable gifting can serve two purposes at the same time: supporting organizations or causes that matter to them while reducing the size of the concentrated holding.
We can help identify shares that may be appropriate to consider for gifting and coordinate the investment and financial planning considerations with your tax professional.
Net Unrealized Appreciation (NUA) and Employer Stock
If you own appreciated employer stock inside certain employer-sponsored retirement plans, Net Unrealized Appreciation, or NUA, is a tax provision that may be important to evaluate before rolling the account into an IRA.
When specific requirements are satisfied, an NUA strategy generally involves distributing employer stock from the retirement plan rather than rolling those shares into an IRA. The cost basis of the shares is generally subject to ordinary income tax when distributed, while qualifying appreciation may receive long-term capital gains treatment when the shares are sold.
This can produce a different tax result than rolling the employer stock into an IRA, where subsequent distributions are generally taxed as ordinary income.
NUA is not automatically the better choice. The analysis can depend on factors such as:
- The stock's cost basis and current market value
- The amount of unrealized appreciation
- Current and expected future tax rates
- When you expect to sell the shares
- Your need for diversification
- The requirements for a qualifying lump-sum distribution
- Your broader retirement and estate planning strategy
Because an IRA rollover can affect the ability to use NUA treatment for employer stock, evaluating the alternatives before initiating a rollover or distribution can be important.
Diversifying a Concentrated Position
Reducing concentration does not necessarily require selling an entire position at once.
Depending on your circumstances, we may evaluate a staged approach to selling shares over time, taking into account unrealized gains, projected income, tax brackets, cash flow needs, and other changes occurring within your financial plan.
As shares are sold, we also consider how the proceeds should be reinvested. This may include diversified portfolios or managed account strategies, such as separately managed accounts (SMAs) or unified managed accounts (UMAs), when appropriate for the client.
The objective is not diversification for its own sake. It is to determine an appropriate level of risk while considering the tax consequences and the role these assets need to play in your financial plan.
Coordinating Investment and Tax Decisions
Concentrated stock decisions frequently cross the line between investment management and tax planning.
Our CFP®, CFA, and CPA professionals can bring financial planning, investment, and tax perspectives to the analysis. This can be particularly useful when comparing the tax impact of different sale schedules, evaluating appreciated securities for charitable gifts, considering an NUA strategy, or coordinating stock decisions with retirement.
Planning in advance can provide more time to understand the available alternatives before a sale, rollover, charitable gift, or other transaction is completed.
If a single stock represents a significant part of your portfolio or net worth, we can help you evaluate the investment, tax, charitable, and retirement considerations before making a sale, rollover, gift, or other decision.
Schedule a ConversationConcentrated Stock FAQs
What is a concentrated stock position?
A concentrated stock position exists when a significant portion of your investment portfolio or net worth is invested in a single company. There is no single percentage that defines concentration for every investor. The relevant risk depends on the size of the position, your other assets, income sources, time horizon, and financial circumstances.
Should I sell my concentrated stock?
Not necessarily, and selling the entire position immediately may not be appropriate.
We consider the investment risk of continuing to hold the stock alongside unrealized gains, potential taxes, cash flow needs, retirement plans, charitable goals, and other assets. In some situations, gradually reducing the position may be considered rather than selling it all at once.
How can I diversify a concentrated stock position while managing taxes?
One approach may be to sell shares over multiple tax years rather than liquidating the entire position at once. Charitable gifts of appreciated shares may also be relevant for investors who already have charitable goals.
The available strategies and their tax consequences depend on the investor's circumstances. Reducing concentration generally involves trade-offs between investment risk, taxes, timing, and other financial objectives.
Can I donate concentrated stock to a donor-advised fund?
A donor-advised fund may accept publicly traded appreciated securities, subject to the sponsoring organization's policies. Donating eligible appreciated shares rather than selling them first may allow an investor to avoid recognizing the associated capital gain, while a charitable deduction may also be available subject to applicable tax rules and limitations.
Once contributed to a donor-advised fund, the assets are generally irrevocably controlled by the sponsoring charitable organization, and the donor retains advisory privileges regarding grants and, depending on the sponsor, investment of the charitable assets.
Should I consider NUA before rolling my 401(k) into an IRA?
If your retirement plan holds appreciated employer stock, NUA may be worth evaluating before completing an IRA rollover.
Rolling employer shares into an IRA can affect the ability to subsequently use NUA treatment for those shares. The potential benefits should therefore be compared with the benefits of an IRA rollover and other available alternatives before a transaction occurs.