The Hidden Risk in Your Retirement Plan—and How to Reduce It Without Paying More Taxes

If you’re happy at your job, it can feel natural to be loyal to your employer by holding onto its stock, especially if it has performed well. But when too much of your retirement savings—more than 5% to 10%, some experts say—depends on a single company’s future, you take on far more risk than you might realize.

Fortunately, there are tax-efficient ways to reduce that risk without sacrificing returns—or paying unnecessary taxes.

Why Too Much Company Stock Is a Risk in Retirement

Putting a large share of your nest egg in your employer’s stock creates concentration risk, which is the threat of potential losses should too large a share of your retirement funds be held in one particular investment or asset class. Due to a lack of diversification, this could mean that your financial future depends on the success—or failure—of one company.

History shows that concentration risk and lack of diversification can be a grave mistake. For example, when the Enron Corporation filed for bankruptcy and began to collapse in late 2001, some employees had 60% or more of their 401(k)s in Enron stock and lost their jobs as well as the bulk of their retirement savings.Retirement income should never depend on exposure to any one stock.

Relying on the performance of a single stock could mean financial ruin in retirement, should the company disappoint.

Start With a Strategic Review of Your Holdings

The first step is to evaluate how much of your portfolio is in company stock.

When reviewing your allocation, consider the following:

• Your age and how close you are to retirement
• Your tolerance for volatility and risk
• The future income you expect to rely on from your retirement accounts

Working with a financial advisor, or using investing calculators and digital tools from a provider like Fidelity Investments, can help you determine whether your asset mix matches your goals.

Tax-Efficient Ways to Reduce Concentration

Reducing company stock doesn’t have to mean a big tax bill. Several strategies can help:

• Net Unrealized Appreciation (NUA): This is the difference between the cost basis, what you initially paid for a stock, and its current value. If you hold employer stock in a 401(k), NUA allows you to move shares to a taxable account, paying ordinary income tax only on the original cost basis. Any future gains are taxed at the lower long-term capital gains rate.
• Tax-loss harvesting: In taxable accounts, you can sell losing positions to offset capital gains from selling appreciated stock. This results in less of your money going toward taxes, and more of your money staying invested.
• Spreading your investment gains over multiple years: If you sell stocks gradually, this may help manage your tax bracket exposure and avoid pushing you into higher marginal tax rates.

How Charitable Contributions Can Offset Tax Impact

Another powerful tool is donating appreciated stock and assets directly to a charity through a donor-advised fund (DAF). By gifting shares instead of cash, you avoid paying capital gains taxes on the appreciation. You’ll also receive a potential charitable deduction of the full fair market value of the asset, of up to 30% of your adjusted gross income (AGI), all while supporting causes you care about. It’s a win-win situation.

This approach may be especially beneficial to high-income earners and high-net-worth individuals seeking to reduce their tax liability in retirement.

Expert Guidance: What a Financial Advisor Recommends

Here’s what one financial expert recommends: 

“Company stock can be a great opportunity to build wealth over time,” explained Lawrence Sprung (CFP), who is a wealth advisor and the founder of Mitlin Financial. “With this opportunity comes the responsibility to ensure your exposure is helpful in reaching your financial goals and [is] not a hurdle.”

Sprung also explained that hiring a financial professional can help you plan on the ideal time to exercise options or unwind some exposure in a tax-efficient manner, while also gaining a solid understanding of the rules that govern your employer plan. A good financial advisor should also be able to help you navigate restricted stock units (RSUs), stock options, and employee stock purchase plans (ESPPs), if these apply to your situation.

Planning Ahead: Diversifying Over Time

Diversification doesn’t need to be immediate. In fact, spreading sales and reallocations over several years may make the most sense for tax planning.

Strategies include:

• Pairing diversification with Roth IRA conversions and required minimum distribution (RMD) planning to balance tax brackets.
• Rebalancing gradually to align with your retirement income timeline.

As your financial situation evolves, it’s important to revisit your portfolio annually to stay on track as tax laws and market conditions can change.

The Bottom Line

While company stock can be a valuable part of your retirement portfolio, too much of it can put your financial security at risk. By taking careful inventory, exploring tax-smart strategies like NUA, tax-loss harvesting, and charitable giving, and by working with a trusted advisor, you can gradually diversify without unnecessarily losing dollars to taxes. The earlier you start planning, the easier it is to strike the right balance between growth, income, and peace of mind.