Transitioning from a Career

David and Laura's Case Study

How Stock Concentration, 401(k) Decisions, and Tax Strategy Impact Long-Term Financial Outcomes

This case study illustrates a common planning situation faced by many families. The individuals described are hypothetical.

Case Study at a Glance

Clients: David and Laura
Key Questions:
“How should we handle the company stock in our 401(k)?”
"Should we consider the Net Unrealized Appreciation (NUA) strategy?"
"How do we reduce our concentrated stock risk without triggering unnecessary taxes?"
"What diversification strategy balances tax efficiency and simplicity?"

Outcome: A coordinated strategy that included:

Partial use of the NUA strategy
A tax-aware diversification plan
Implementation of a tax-loss harvesting SMA
A simplified portfolio aligned with retirement goals

Topics Discussed

Net Unrealized Appreciation (NUA) is a tax strategy for clients holding employer stock in a 401(k). It may allow you to pay ordinary income tax only on the original cost basis of the shares upon distribution, while the appreciation (gain) is taxed later at lower long-term capital gains rates.

Separately Managed Accounts (SMAs) can assist with reducing tax liabilities, and may be ideal for high-net-worth individuals. They offer superior tax-loss harvesting capabilities compared to mutual funds, allowing investors to offset capital gains.

Executive Summary

Many professionals nearing retirement discover that a large portion of their wealth is tied to their employer.

This often occurs through:

Restricted stock grants
Employee stock purchase plans
Company stock held within retirement plans

While these programs can create substantial wealth, they can also lead to significant portfolio concentration and complicated tax decisions during retirement.

In David and Laura’s case, the transition from career to retirement involved three interconnected decisions:

Evaluating whether company stock inside the 401(k) should use the Net Unrealized Appreciation (NUA) strategy
Determining how to diversify a concentrated stock position
Managing the tax impact of those decisions

Rather than addressing each decision independently, the couple worked through Monument Group Wealth Advisors’ Master Planning process to evaluate the options holistically.

The result was a strategy that reduced concentration risk, managed taxes thoughtfully, and avoided unnecessary complexity.

The Situation

David spent nearly 30 years working for the same publicly traded company.

Over time, his compensation included:

Stock grants
Employee stock purchase programs
Company stock inside the retirement plan

By the time he retired, the company shares represented a large portion of the household’s net worth.

This raised an important question:

How do we diversify without creating a large or unnecessary tax burden?

They want to travel, spend meaningfully on family, and use their wealth intentionally – while also managing taxes, market volatility, and longevity risk.

Planning Opportunity: The NUA Strategy Inside the 401(k)

One of the most important planning decisions involved the company stock held inside David’s 401(k) plan. Under certain circumstances, investors may benefit from a tax strategy known as Net Unrealized Appreciation (NUA).

What NUA Does
The NUA strategy allows company stock inside a retirement plan to be distributed into a taxable brokerage account. Instead of paying ordinary income tax on the full value of the shares, the investor pays ordinary income tax only on the original cost basis of the stock.

The remaining appreciation becomes long-term capital gains when the shares are eventually sold. This can create meaningful tax savings when the stock has very large embedded gains.

Why NUA Worked in This Case

David’s company stock inside the 401(k) had:

A very low cost basis
Significant unrealized appreciation
This made the NUA strategy attractive for a portion of the shares.

However, NUA decisions require careful evaluation. Key factors include:

The ratio of cost basis to market value
Current and expected future tax brackets
The investor’s diversification goals
Liquidity needs

After analysis, David and Laura implemented partial NUA treatment for the company stock and rolled the remaining retirement assets into an IRA.

This created flexibility for managing the broader portfolio.

Your NUA Decision

We set an initial spending level and defined clear “guardrails” that indicate when to increase or reduce spending as markets evolve.

Diversifying a Concentrated Stock Position

Even after addressing the retirement plan structure, the larger challenge remained:

How should they diversify the concentrated stock position?

David and Laura knew they wanted to reduce their exposure to a single company, but they were unsure about the most tax-efficient way to do so.

To clarify the options, we discussed a continuum of diversification strategies, ranging from simple approaches to more sophisticated structures.

The Diversification Strategy Continuum

The Simple Approach

Time-Based Diversification

Selling shares gradually over time — monthly or quarterly — spreads tax realization across multiple years and reduces timing risk.

Advantages:

Simple
Transparent
Easy to implement

Moderately Sophisticated Approaches

1. Tax-Managed SMAs
Separately managed accounts designed for tax-loss harvesting can generate losses that offset gains realized from selling concentrated stock.

This allows diversification while improving after-tax outcomes.

2. Long-Short Tax-Managed Strategies
Some SMAs use long-short strategies to generate additional losses that may offset realized gains.

These strategies attempt to maintain market exposure while improving tax efficiency.

More Complex Strategies

For very large stock positions, more advanced strategies may also be considered.

Examples include:

1. Exchange Funds
Exchange funds allow investors to contribute concentrated stock into a partnership in exchange for diversified holdings after a multi-year holding period.

2. Option-Based Hedging
Protective collars or options overlays can limit downside risk while delaying taxable sales.

Charitable Diversification Strategies

Investors with philanthropic goals sometimes diversify using:

Donor-Advised Funds
Charitable Remainder Trusts

These approaches can reduce taxes while supporting charitable objectives.

Concentrated Stock Diversification Continuum

We routinely present the continuum of diversification strategies, ranging from simple approaches to more sophisticated structures.

The Decision: Simplicity With Tax Awareness

After reviewing the available strategies, David and Laura made an important observation:

They wanted to simplify their financial lives as they entered retirement.

While they appreciated understanding the full range of strategies, they preferred an approach that balanced tax efficiency with clarity.

Their final strategy included:

Gradual sales of the concentrated stock position
Implementation of a tax-loss harvesting SMA
Reinvestment into a diversified portfolio aligned with their retirement goals

This approach allowed them to reduce concentration risk while managing taxes — without introducing unnecessary complexity.

Planning Insight

Complex strategies are not always better strategies.

Many investors assume that the most sophisticated planning techniques produce the best outcomes.

In reality, the most effective strategy is often the one that balances:

Tax efficiency
Risk management
Simplicity

For David and Laura, a disciplined diversification plan supported by tax-loss harvesting achieved their goals while keeping their financial lives manageable.

The Outcome

By coordinating the 401(k) decision, the NUA strategy, and the diversification plan, David and Laura achieved several important outcomes:

Reduced exposure to a single company
Positioned retirement assets for greater flexibility
Managed taxes thoughtfully during the transition
Built a diversified investment structure aligned with retirement

Most importantly, they felt confident that the transition from career to retirement had been handled intentionally rather than reactively.

Frequently Asked Questions

What is Net Unrealized Appreciation (NUA)?

Net Unrealized Appreciation is a tax strategy that may apply when company stock is held inside a retirement plan such as a 401(k). Instead of paying ordinary income tax on the full value of the stock when it is distributed, the investor pays ordinary income tax only on the original cost basis. The remaining appreciation may qualify for long-term capital gains rates when the shares are eventually sold.

For David and Laura, the low cost basis of the company stock inside the 401(k) made partial NUA treatment an effective way to reduce the overall tax impact of the retirement transition.

How risky is holding a large amount of employer stock?

Holding a significant percentage of wealth in a single company can create concentrated risk. If the stock declines, it can affect both employment income and investment assets at the same time — particularly during a career transition when other income sources may be changing.

David and Laura recognized this risk and chose to diversify gradually, balancing tax efficiency with the goal of reducing their dependence on a single company's performance.

What is the best way to diversify a concentrated stock position?

There is no single best approach. Strategies range from simple time-based sales to tax-managed investment accounts, exchange funds, option-based hedging, and charitable structures. The right approach depends on the size of the position, the embedded tax liability, and the investor's goals for simplicity and flexibility.

After reviewing the full range of options, David and Laura chose a straightforward strategy — gradual sales combined with a tax-loss harvesting SMA — because it balanced tax efficiency with the simplicity they valued heading into retirement.

Should I roll my 401(k) into an IRA when I retire?

It depends on the specifics. An IRA rollover often provides greater investment flexibility and more control over withdrawal strategies. However, some employer plans offer advantages worth evaluating, such as lower fees, specific investment options, or access to tax strategies like NUA that require assets to remain in the plan until distribution.

In David and Laura's case, partial NUA treatment was applied to the company stock before the remaining retirement assets were rolled into an IRA — combining the tax benefits of both approaches.

Is Your Situation Similar?

If you are approaching retirement and much of your wealth is tied to employer stock, it may be helpful to evaluate how stock concentration, retirement plan decisions, and taxes interact.

The Master Planning process is designed to help families evaluate those decisions in a coordinated way.

Case Study Disclosure
The individuals and scenarios described in this case study are hypothetical and are intended solely for illustrative purposes. While the circumstances presented reflect situations commonly encountered by clients of Monument Group Wealth Advisors, they do not represent the experience of any specific client. Results will vary based on individual circumstances, market conditions, and other factors.

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