You're an ExxonMobil employee. You've worked a long career. Now, because either you're finally ready, or you've been encouraged to retire, it's decision time. One particular decision you face: what to do with all that ExxonMobil stock that's accumulated in your ExxonMobil Savings Plan over the years?
For lots of ExxonMobil employees, a significant portion of your anticipated retirement wealth is in your ExxonMobil Savings Plan (EMSP). The EMSP is ExxonMobil's 401(k) / profit-sharing plan. And for many, a large chunk of that wealth is invested in ExxonMobil common stock (XOM).
But as most shareholders are painfully aware, ExxonMobil stock is at levels last seen in the early 2000s. For many, selling the stock now, below what it initially cost, hurts. If you're a retirement-eligible employee and you don't want to sell shares of XOM at these low prices, what are you to do? If you plan to leave ExxonMobil and you've got XOM stock in your EMSP, what's the right strategy?
ExxonMobil stock is at levels last seen in the early 2000s.
Here are four strategies to consider.
1) Retain Your EMSP Account
You don't have to take a distribution of your EMSP account when you retire. Under current plan rules, you can generally keep your account as a retiree. This enables you to avoid making any new decision about XOM. You can continue to collect dividends and hope the price goes up.
A plan well-designed to accumulate assets is not necessarily most appropriate when it comes time to "de-cumulate."
Advantages of this approach include extremely low management fees on your investments. You're familiar with the passive, index fund investment options. You have the ability to withdraw cash once or twice a year if you need the money. But your investment options are limited and somewhat inflexible. You have no equity exposure to emerging markets like China, India, and Latin America, a significant part of the investment universe. The Bond Units fund is subject to price declines should interest rates rise, given its concentration in longer-term bonds and U.S. Treasury bonds. You're restricted on trading frequency. In short, a plan well-designed to help employees accumulate assets is not necessarily the most appropriate when it comes time to "de-cumulate."
2) Roll Over Your EMSP Account, Including XOM, Into an IRA and Sell Shares Later
It's possible to roll over shares of XOM in kind (as shares of stock) into an IRA. The Plan would send a check for the cash in your account from liquidating your non-XOM investments to your IRA custodian. Your shares of XOM will be placed into an account with Computershare (ExxonMobil stock transfer agent). You'll likely need to request a transfer of those shares to your IRA, but they can move into your IRA without incurring taxes. Once in the IRA, you can decide whether and when to sell them, collect dividends on retained shares, and diversify your assets. A disadvantage of rolling XOM stock into an IRA is that you forego the opportunity to apply Net Unrealized Appreciation (NUA) tax treatment to those shares. But, as discussed in a prior blog, not everyone needs to take advantage of NUA.
3) Transfer XOM Shares to a Brokerage Account
Alternatively, transfer your XOM shares to an investment or brokerage account. If you have sufficient after-tax contributions in your EMSP account, you can "attribute" those dollars to the cost of the shares, and you'll not have to pay taxes on the cost basis of the shares. Otherwise, the IRS considers the distribution to be taxable, and they'll tax you on the cost basis of the shares. But by putting the shares in a brokerage account, you can determine when you want to sell them, and you'll only pay capital gains taxes on the appreciation over the cost of the shares. That's likely a lower tax rate than what you'd pay if you raised the same amount of cash by taking a distribution from your IRA and paying tax as ordinary income. Additionally, appreciated shares inside a brokerage account are an excellent source for charitable donations.
Why Are These Tough Choices?
The human mind is not designed for investing. There's an entire field called behavioral finance that focuses on the investing mistakes we often make. We use short-cuts to make decisions, short-cuts that are often wrong. We focus on the past and what we paid for an investment, as though a paper loss really matters more than future returns. We often buy what's familiar, rather than what's likely to provide better returns.
The human mind is not designed for investing.
Successful investing is forward-looking. Invest in assets that are most likely to give you the best return going forward, recognizing your risk tolerance and time horizon. Diversify among many assets classes because, quite frankly, we don't know what the future holds.
Note that this is neither a recommendation to hold on to ExxonMobil stock nor to sell it. But the fourth alternative is to take the emotional hit and move forward.
4) Sell Your XOM Now, Roll Over the Cash, and Invest in Other Assets Inside an IRA
Yes, it is painful. But buckle up, Bubba, and acknowledge that it may take years for XOM to recover. Sell the stock inside your EMSP, and do a rollover of cash to an IRA. This is the simplest approach, but it takes a lot of discipline to put aside years of loyalty to ExxonMobil and decades of good stock performance (in the '80s, '90s and '00s) to bail out at current price levels.
Rolling over your taxable assets from the EMSP to an IRA permits you to diversify your investments, take distributions when you like, and defer mandatory required minimum distributions (RMDs) until age 72. Your assets continue to grow tax-deferred. You can also consider doing Roth conversions from your IRA in those years between retirement and taking RMDs, when your tax rate is likely lower than it will be once you begin Social Security and have to take RMDs.
It's a tough decision, with hopes, fears, and emotions all mixed in. You have to decide what's best for you and your family. It can be prudent to talk with an objective third party when making consequential financial decisions. We've worked many years with ExxonMobil clients, and would be glad to consult with you. Schedule a call or send us a note. And good luck!
[Suggested Blog: How Much ExxonMobil NUA Stock is Too Much?]
Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation. Information about the ExxonMobil Savings Plan is believed to be accurate, but no guarantees can be made, as Plan details are subject to change by the Plan sponsor. The author is not an employee of ExxonMobil and his views are his own.