Company Stock In Your 401(K)? Don't Make My Costly Mistake

Jun. 07, 2016 3:08 PM ET28 Comments
Eric T. Johnson profile picture
Eric T. Johnson


  • Company stock in your 401(k) has special rules, specifically an available tax treatment called Net Unrealized Appreciation.
  • Under the right circumstances, you pay only the capital gains tax rate on appreciation, rather than regular income rates.
  • Proceed with caution any time you consider selling, rolling over, or withdrawing shares of company stock in your plan.

I recently took a critical look at my portfolio and decided I finally agreed with what advisors, formal and otherwise, had told me for years: I was much too concentrated in a single stock.

Fortunately for me, the concentration was in a good place. I worked for Microsoft (NASDAQ:MSFT) for a few years in the early 1990s. While there, I took advantage of three ways to invest in the company stock:

  • An employee stock purchase plan, which allowed us to buy stock with a payroll deduction into a taxable account
  • Options on the stock, offered as an incentive, and
  • Employees could put their 401(k) money into company stock.

Between the three, I accumulated some stock in both my taxable account and in my 401(k). When I left the company, I kept the 401(k) plan intact, including the stock I kept within the plan.

Twenty years later, the value of those shares has grown substantially.

As you probably know, a 401(k) plan allows pre-tax money to be invested, which reduces your taxable income and helps you pay a lower tax bill the year it was earned. Those dollars, plus (usually) any investment gains, are taxed as regular income when you withdraw them in retirement. You get the advantage of delaying the tax (tax deferment), and also pay a lower overall tax if your marginal rate at retirement is lower than when the money was earned in the first place.

Because the money has never been taxed, when you make trades within a 401(k) plan, those trades do not create a taxable event, since you square up with the IRS upon withdrawal in retirement. You can often rebalance your whole portfolio by moving things around within your tax-advantaged plans like a 401(k), without triggering any capital-gains taxes. For instance, if you decide you need a higher concentration of bonds

This article was written by

Eric T. Johnson profile picture
I am an individual investor who began investing in the early 1990s. Professionally, I am a business analyst for a division of a Fortune 500 company. Additionally, I am an adjunct instructor at a local university, where I usually teach Math. I hold a bachelor's degree in Computer Science and an MBA.

Disclosure: I am/we are long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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