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Sell Your 401(k) Company Stock Right Now!

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KMC is a reformed debtor who got religion when he married his wife of 11 years. He learned he had a hidden interest in all things personal finance. He writes about it at Advanced Personal Finance.

The Pension Reform Act of 2006 included lots of improvements for 401(k)s, but one of the most important is the ability to sell company matching stock. If you work for a public company, the match your employer provides in your 401(k) is almost certainly in company stock. Until now, you couldn’t do anything to diversify that investment. In other words, you couldn’t sell the company stock and invest in an index fund within your 401(k). As just about any investment advising source will tell you, diversity is a key element of sound financial planning.

Diversification is the principle that says it’s inappropriate to keep more than 10% of your portfolio in any one stock. The percentage recommended may vary by source, but the idea is the same – don’t keep all your eggs in too few baskets. In the case of company stock in a 401(k), assuming you’re currently employed by that company, you have two bets going in the same direction. Your income largely depends on the company’s fortunes and your retirement account does, too. This makes holding a large amount of stock in your own company very risky.

As of this year, thanks to the Act, you no longer have to hold company stock in your 401(k). There are two important pieces to the law in this respect. First, you must be allowed to sell the stock currently in your account after no more than three years. So in practice, you can sell one third the first year (2007), one third the second year, and the final third the year after that. Second, any future matching stock can be sold at any time.

At the beginning of this year, that’s what I did. I went to my 401(k) manager’s website and put an order in to sell the third of my currently-held stock I was eligible to sell. I also designated that future employer contributions should automatically mirror my own contribution allocations. It was easy and corrected a problem I’d seen since working at my current employer.

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8 Responses to “Sell Your 401(k) Company Stock Right Now!”

  1. Kurt says:

    “If you work for a public company, the match your employer provides in your 401(k) is almost certainly in company stock.”

    I think you’re overstating how common that his. I know at least at this company, matches are allocated pro rata to the funds you select for your own contributions. One of those is the company stock fund, but well, that’s you’re choice.

  2. Foobarista says:

    This is a bit of a tangent, but one argument for _not_ doing this is if you plan to leave your company shortly, and have a lot of gain in your company stock. Here’s a good article on this topic.

    In short, if you have company stock in your 401K and quit your job, you can take the stock out, pay ordinary income tax and penalties on the cost basis (ie, the cost of the stock when the company gave it to you) of the stock, sell it, and pay capital gains tax on the stock appreciation (here, meaning the sale price of the stock minus its cost basis). Depending on the situation, this may well be better than rolling the company stock over into an IRA and doing withdrawals at retirement age that are taxed at ordinary income rates.

  3. Foobarista says:

    At many companies, you don’t have a choice; your employer match is given in stock, not cash, with restrictions as to when you can sell it. I wouldn’t buy company stock in a 401K either.

  4. Average Joe says:

    I most definitely agree with this post.

    Too many horror stories (Enron, Worldcom, etc..) of people completely relying on 1 company for their salaries and retirements. So take that matching contribution and diversify.

  5. Debt Hater says:

    I’m glad to know this considering my company’s stock in my 401k is the lowest performing “basket” in my mix. It’s lost value every quarter for the past year and is far lower than it was just a few years ago. All of the company match is in the stock. I will be unloading as much as I am eligible to get rid of, post haste.

  6. Great news. My wife’s 401k is WAY heavy in company stock.

    Changing that ASAP.

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  8. Barbaara Vasquez says:

    I am trying to sort this “STOCK SELLING” process for 2 years, and still am not clear on the process.

    I have company stock in my 401K, am retired. I would like to sell the stock, and understand that I can go to a discount broker to do this. I’m clear on that part of it. Here’s my question?

    Do I contact the plan administrator and tell her that I want all my stock to be transferred into a taxable broker’s account?

    Is there a difference in receiving them by stock certificate and/or a cashier’s check made payable to the broker.

    I do believe that the money must not pass through my hands.

    Then once the account is set up, I can turn around and sell them and then give my cash?

    I believe that I can sell them the next day if I want to?

    CAN ANYBODY OUT THERE CONFIRM AS TO WHETHER I’M INERPRETING THIS CORRECTLY; AND MAYBE COULD PUT IN A MUCH SIMPLIER THAN I DID.

    ANY tips on discount brokers?\

    thanks


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