Globe Life Employees: Smarter Ways to Manage Taxes on Appreciated Stock
'Globe Life employees with concentrated stock positions may benefit from thoughtful tax planning that allows for tax deferral while balancing liquidity, compliance, and long-term compounding,' Wesley Boudreaux, a representative of The Retirement Group, a division of Wealth Enhancement.
'Globe Life employees who hold highly-appreciated stock may want to consider tax-efficient strategies that help mitigate their liabilities while aligning with their overall retirement goals,' Patrick Ray, a representative of The Retirement Group, a division of Wealth Enhancement.
In this article, we will discuss:
How taxes can affect investment returns, particularly on concentrated stock positions.
Exchange funds and options-based strategies as methods for tax deferral and diversification.
Alternative planning techniques outside ETFs, including charitable trusts and gifting strategies.
By Carlos Hernandez, Wealth Enhancement advisor
When it comes to driving portfolio returns, many investors aim to keep management fees low by investing in low-cost index funds and exchange-traded funds (ETFs). While fees matter, however, the real culprit for lower-than-anticipated performance is taxes.
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Wealth Enhancement advisor Carlos Hernandez explains: 'By losing less to taxes each year, investors have access to more capital that can continue to compound over time. This makes tax deferral an important part of an effective financial plan.' Globe Life employees looking for long-term growth strategies could benefit by understanding how to better manage their investment tax burdens.
Trade Money
One area where taxes can take a toll is on the sale of company stock or other concentrated investment positions. Globe Life professionals looking to diversify could face significant capital gains taxes on an outright sale. One way to diversify without triggering immediate capital gains is through exchange funds. By contributing their highy-appreciated stock to a pooled fund, investors can trade their concentrated holdings for shares in a diverse basket of securities. This method can be used by Globe Life employees who want to diversify while postponing taxable events.
Although this method allows for tax deferral, it also requires investors to hold the exchange fund for a period of time, typically seven years.
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This could create a challenge for investors who require liquidity. Additionally, these funds are often exclusively accessible to wealthy, accredited investors—something Globe Life executives should carefully evaluate.
Funds Based on Options
Another way to mitigate taxes on the sale of highly-appreciated stock is by using options contracts. The idea is to hedge risk with put options while covering the cost of those puts by selling call options—a strategy called 'collaring'. From there, the strategy reverses, with investors selling put options and using the proceeds to buy call option on an equity or bond index.
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If managed effectively, this helps to diversify a concentrated portfolio while still maintaining liquidity.
Given the complexity of this strategy, meticulous planning is necessary. It's generally recommended that investors work with an experienced financial advisor before pursuing this approach.
Things to Be Aware of
Although these strategies can be beneficial for Globe Life employees who hold highly-appreciated stock, caution is recommended. There are costs associated with these approaches, and potential liquidity risks. Additionally, the IRS may eventually contest such arrangements because their tax status has not been thoroughly examined—something Globe Life retirees should keep top of mind.
'Tax drag reduction strategies can be effective, but they must be assessed through the lens of risk, liquidity, cost, and compliance,' warns Carlos Hernandez. What is appealing in theory must hold up to inspection in the real world.
Alternative Strategies
Although they show promise, investors with highly-appreciated stock or those looking to postpone gains have other alternatives besides exchange funds or options. Other tactics could include:
- Prepaid variable forwards (subject to IRS regulations, contracts to sell at predetermined terms in the future).
- Charitable remainder trusts (CRTs), which allow investors to donate appreciated stock to a charitable trust and receive a stream of regular income in return.
- Donor-advised funds (DAFs), which provide investors with a tax deduction for the fair market value of the appreciated stock they donate.
- Other gifting techniques, such as direct donations to charity or family.
Each has its own set of guidelines, advantages, and disadvantages. To limit unnecessary taxes or violating the constructive sale regulations, careful planning is necessary for Globe Life professionals managing complex portfolios.
The Bottom Line
Although the movement to mitigate the tax burden on investments is not new, the instruments are changing. Both exchange funds and options-based structures offer investors a way to manage tax liabilities, especially for Globe Life employees who hold highly-appreciated stock.
In the end, taxes are unavoidable. However, with the correct set of instruments, they can be controlled and postponed. 'The real value comes from aligning tax strategy with investment strategy,' summarizes Carlos Hernandez.
What type of retirement plan does Globe Life offer to its employees?
Globe Life offers a 401(k) retirement savings plan to its employees.
How can employees of Globe Life enroll in the 401(k) plan?
Employees of Globe Life can enroll in the 401(k) plan through the company’s HR portal or by contacting the HR department for assistance.
Does Globe Life match employee contributions to the 401(k) plan?
Yes, Globe Life provides a matching contribution to employee contributions up to a certain percentage, as outlined in the plan details.
What is the maximum contribution limit for employees participating in Globe Life's 401(k) plan?
The maximum contribution limit for Globe Life's 401(k) plan follows the IRS guidelines, which may change annually. Employees should check the current limits for the specific year.
Can employees of Globe Life take loans against their 401(k) savings?
Yes, Globe Life allows employees to take loans against their 401(k) savings, subject to the terms and conditions of the plan.
Is there a vesting schedule for employer contributions in Globe Life's 401(k) plan?
Yes, Globe Life has a vesting schedule for employer contributions, which means employees must work for a certain period before they fully own the employer's contributions.
What investment options are available in Globe Life's 401(k) plan?
Globe Life's 401(k) plan offers a variety of investment options, including mutual funds, target-date funds, and other investment vehicles.
How often can employees change their contribution amounts in Globe Life's 401(k) plan?
Employees of Globe Life can change their contribution amounts typically on a quarterly basis or as specified by the plan rules.
Are there any fees associated with Globe Life's 401(k) plan?
Yes, there may be fees associated with Globe Life's 401(k) plan, including administrative fees and investment management fees. Employees should review the plan documents for details.
What happens to an employee's 401(k) account if they leave Globe Life?
If an employee leaves Globe Life, they can choose to roll over their 401(k) balance to another qualified plan, withdraw the funds, or leave the balance in the Globe Life plan if permitted.
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