Single stock non-inheritance windfall – $440k of ORLY all in my name

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ORLYwindfall
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Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by ORLYwindfall »

Hello!

I have a somewhat unique situation and I wasn't able to find a post in the forums that specifically covered it. I apologize if this reads like a repeat of a common topic (lots of the general windfall advice will likely apply here). However, the situation is just different enough for me to still have questions after reading up on other windfall posts.

In 1998 my dad was encouraged by his financial advisor to invest $5,000 in a stock in my name as a way to offset his taxes that year. I'm not sure the logistics of that, but he did indeed make the investment. He chose to invest the $5,000 into O'Reilly Automotive stock (ORLY). He then FORGOT that he had done this until a couple months ago. The result is that, after 23 years and several splits, I am now the owner of 738 shares of ORLY at a current value of $440,733.60. This is not an inheritance nor is it a stock transfer. It was purchased under my name and the first shares have already hit my Merrill Lynch account (my father uses Merrill so the cleanest solution was for me to also open a Merrill account).

I am a novice when it comes to investments and financial literacy. However, I finally had a decent amount of money in savings and I was on the cusp of beginning my investment journey. The Bogle method seemed perfect for me. And then this windfall happened and things went from "novice" to "advanced" very quickly.

I have some very basic questions and would love any feedback and advice:
  • Are there any tax implications I need to be aware of now that I am in full possession of these shares?
  • What steps do I take to re-invest these shares in index funds, other stocks, bonds, etc? I legitimately do not know the basics of buying and selling stocks
  • Is there a way to use a Roth IRA to my advantage in this situation? I do not currently have one.
  • Are there any benefits to opening a Vanguard or Fidelity account rather than using Merrill? If so, are there fees for transferring between these accounts?
  • In general, what would your strategy be given this situation? I've listed goals and personal information below for context
Thank you for reading through this and thank you for any advice or guidance you might have! I truly appreciate it.

Financial goals: Buy a home in 5-10 years and begin legitimately saving for retirement

Life status: Early 30s. Married. Wife gainfully-employed. No children. Currently renting in very high cost of living Los Angeles. We would either look to buy a home here (wishful thinking even with the windfall) or buy a home in the midwest and move back. I work in the volatile film production world, which is a "feast or famine" financial lifestyle (hence my late entry into the world of investing).

Emergency funds: Three to six months of expenses

Debt: No current debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: Early 30s

Savings: $27k

Investments: No investments or stock portfolio outside of the new ORLY stock

Retirement: No IRA or 401k (wife has a 401k through her employer)

Annual income: Income fluctuates between $60k and $75k/year. Wife makes roughly $100k/year

Desired Asset allocation: 70% stocks??? / 30% bonds???
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illumination
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by illumination »

There's no way to dodge the tax if its in your name and not in a retirement account. Real shame it wasn't purchased in a Roth IRA.

I would take it out of Merril Lynch as you're likely paying an AUM fee for them to be a custodian of a single stock. Somewhere like Schwab or Fidelity would be free.

You're going to have to make the call whether you should sell all of it and just take the tax hit in order to diversify. The standard Boglehead response would say yes, you should sell, pay the tax, and move the proceeds to something more diversified as single stock risk with a large part of your net worth is extremely risky.

Since the money is fungible, you can now every year max your retirement accounts and take a tax break every year by making those contributions.
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David Jay
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by David Jay »

Welcome to the forum!
ORLYwindfall wrote: Thu Jul 29, 2021 4:06 pm
I have some very basic questions and would love any feedback and advice:
  • Are there any tax implications I need to be aware of now that I am in full possession of these shares?
Yes, the shares will produce dividends and those dividends will be taxable at your regular income rate (22%? based on household income). If you sell any shares, you will pay capital gains taxes (which is a lower rate than regular income).

Then there is the bigger question of whether you were paying taxes on dividends over the last 23 years, and if not, who was paying those taxes. You may need some expert advice on past taxes.

  • What steps do I take to re-invest these shares in index funds, other stocks, bonds, etc? I legitimately do not know the basics of buying and selling stocks
Again, every sale will generate taxable capital gains. So you need to do this slowly and with some advance planning. I would immediately turn off any "reinvest" option so all of the dividends end up as cash in your account ready to purchase index funds
  • Is there a way to use a Roth IRA to my advantage in this situation? I do not currently have one.
Yes, you can make $6000 contributions for yourself and your spouse if married. I would use the money from dividends. If you find, due to these dividends, that you are close to the ~$195,000 limit for direct Roth contributions, you can use a process called a "backdoor Roth" to get the money into a Roth tax free.
  • Are there any benefits to opening a Vanguard or Fidelity account rather than using Merrill? If so, are there fees for transferring between these accounts?
A regular Merrill account will typically involve high fees and an advisor. I would open a "Merrill Edge" account if you want to stay at Merrill but want to do your own decision making.
  • In general, what would your strategy be given this situation? I've listed goals and personal information below for context
I would probably select a level of income and begin selling a portion of your ORLY stock each year, in order to diversify. Perhaps to the top of the 22% tax bracket.
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calmaniac
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by calmaniac »

1. You will own capital gains tax on any of the stock you sell. At your income, federal cap gains tax will be 15%, but could go up if your income goes up. Not sure about California taxes.

2. You will definitely want to unwind out of the ORLY stock and get more diversified, such as a total market index fund. The longer you keep that individual stock the more chance ORLY could take a hit. May be best to get out as quickly as you can without your taxes going haywire. Talk with an accountant.

3. Do you have an emergency fund? If not, that should be the first thing you do. See https://www.bogleheads.org/wiki/Emergency_fund

4. Have you read William Bernstein's free ebook: If You Can? It has the essential elements of financial planning. There are many more details, but this book hits the main points in just a handful of pages. Wife should read it too!

5. There are ways to take advantage of market downturns, such as March 2020, and sell your highly appreciated stock when the market is down, and buy index ETFs. However, you may be waiting forever for that, so best to get started selling most of it in the next few years. If we do have a big crash, sell some ORLY and immediately put the proceeds into a total market index fund (you will owe tax on the stock sale).

6. Don't use any advisor who either charges a yearly fee (assets under management) or who wants to sell you some insurance/hybrid product. They will suck you dry.
Last edited by calmaniac on Thu Jul 29, 2021 4:34 pm, edited 1 time in total.
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retired@50
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by retired@50 »

David Jay wrote: Thu Jul 29, 2021 4:30 pm Then there is the bigger question of whether you were paying taxes on dividends over the last 23 years, and if not, who was paying those taxes. You may need some expert advice on past taxes.
No dividends since at least 1993, according to Yahoo! Finance. See link.

https://finance.yahoo.com/quote/ORLY/hi ... Close=true

Several stock splits:
https://finance.yahoo.com/quote/ORLY/hi ... Close=true

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arcticpineapplecorp.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by arcticpineapplecorp. »

ORLYwindfall wrote: Thu Jul 29, 2021 4:06 pm
  • Are there any tax implications I need to be aware of now that I am in full possession of these shares?
  • What steps do I take to re-invest these shares in index funds, other stocks, bonds, etc? I legitimately do not know the basics of buying and selling stocks
  • Is there a way to use a Roth IRA to my advantage in this situation? I do not currently have one.
  • Are there any benefits to opening a Vanguard or Fidelity account rather than using Merrill? If so, are there fees for transferring between these accounts?
  • In general, what would your strategy be given this situation? I've listed goals and personal information below for context
congrats. my dad invested $8000 in my name in the 80s (unbeknownst to me) when I was a minor, but the company went bankrupt (which is how I found out about it from my dad). He showed me how to claim the losses over the next three years ($3000, $3000 and $2000).

anyway, there aren't tax implications unless you sell, then you're looking at cap gains. Based on your household income and a rough calc I did in taxcaster (I used $160k income MFJ) looks like you'd pay 15% unless you sell the whole thing, then it looks like you'd pay $82,214 which looks like 18% total in tax on $435,733 in LTCG : https://turbotax.intuit.com/tax-tools/c ... taxcaster/

https://www.bogleheads.org/wiki/Capital ... stribution

You can contribute to a Roth for you and your wife, but that won't change the situation tax wise because a Roth is after tax. It's still a good idea though.

What could help is (if your wife isn't maxing her 401k) for her to max out her 401k which will save her 22% in tax and sell out an amount that equals that taxwise from the stock. So, lets say she can contribute another $10,000 to her 401k that she normally doesn't. That would save her $2200 in tax. Which means an she's really only losing $7800 from her pay. You can sell $9200 of the stock and pay the 15% tax ($1380) and be left with $7820 in cash (what she lost in wages by contributing $10,000 to her 401k).

If you don't want the stock or would hate to see losses just sell it an pay the cap gains tax. Because the cap gains tax is less than 100% you'll be left with far more than your dad originally invested and you'll have money despite the taxes.

Or have a strategy to sell a certain amount each year, but realize stocks can go to $0 despite how they did in the past. Take a look at GE to see what I mean.

Once you sell, diversify with vtwax (or VT) or vtsax and vtiax (or similar ETFs). You can just invest in a taxable account once you've maxed out all retirement accounts (Roths and 401ks).

A fine is a tax for doing the wrong thing.
A tax is a fine for doing the right thing.

Consider it a success tax and move on.
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NancyABQ
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by NancyABQ »

Good thing this stock hasn't been producing dividends with no taxes being paid, all these years!

Since OP says they are inexperienced with investing, I would start small.

1) Consider moving to Schwab or Fidelity (but if the account at Merrill Lynch is not an AUM account, maybe it's fine to leave it there, not sure -- you want to figure this out first). It could also be Vanguard, but Schwab or Fidelity will probably pay you a small bonus for moving your stock there, and they will be more willing to hold your hand. Also make sure this is a Transfer-in-kind, where you don't actually sell the stock, you just transfer it -- very important!

2) Depending where you end up, figure out the lowest expense ratio US Stock Index fund you want to purchase. At Schwab this would probably be SWSTX, Fidelity has similar and maybe Merrill Edge does also?

3) Do a test transaction of ~$5000 (I'm just picking a number). This will generate ~$5000 of long term capital gains. You will need to pay taxes on this, so if you need to set aside 15% of $5000 to cover the taxes, do that. Sell $5000 of ORLY and purchase $5000 worth of your preferred index fund.

4. Once you are comfortable with this process, figure out tax impacts and repeat the process with larger amounts over a couple years. For the larger amounts you may want to consider funding a Roth, leaving some in cash for other needs (setting money aside for taxes, paying estimated taxes if applicable!), etc. But for that first "test transaction" in step 3, you don't need to have figured all of that out.

Nice unexpected windfall. Congrats!
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by TropikThunder »

He chose to invest the $5,000 into O'Reilly Automotive stock (ORLY). He then FORGOT that he had done this until a couple months ago. The result is that, after 23 years and several splits, I am now the owner of 738 shares of ORLY at a current value of $440,733.60.
This would make a good example for the pro-dividend zealots who say a stock that doesn't pay a dividend is worthless.
AquaBliss
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by AquaBliss »

This will sound outlandish but I would consider it (but hey that's just me). First, calculate what is your after tax take home pay in CA with $160k total income filing as married filing jointly. Would guess around $115-$120k in CA?

Anyhow, if you can make due with $104,800 in annual income in a LOC state or area, you can get away with paying NO TAXES on any of this gain.

1) Move to a state that doesn't tax Long Term Capital Gains (FL/TX/NV to name a few)
2) Sell only $104,800k per year worth of your ORLY stock and make ZERO other documented income in that year
3) You owe ZERO federal tax and ZERO state tax, and can enjoy the entire $104,800k per year TAX FREE

This is because you get a married filing jointly standard deduction which brings your $80,000 $0 long term capital gains rate up to $104,800 ($80k + $24.8k standard deduction)

Remember though, you can't SELL the $104,800k worth until that calendar year, and don't sell a penny more! You and your wife could take 3 years off work, move to Florida and relax in the sunshine while enjoying the beaches.

I know someone will kill this idea by saying "hey what about healthcare costs"... This won't be so awful using ACA but it would have to be worked into your expenses. I'll just say that 99.9% of us don't get a windfall like this so early in life - take it, enjoy it, and experience life and freedom a bit.

Anyhow, watch this video he does a better job explaining than me:
https://www.youtube.com/watch?v=sEx60f4K-dA
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Small Savanna »

You should diversify. To ease the tax bite, I'd recommend selling half now and half in January. Put most of it into index funds or target date funds at a low cost provider like Vanguard or Schwab. Spend some of it on something you want but couldn't afford, like a new car or a nice vacation. Once you know where you are going to live, use some of the money for 20% downpayment on a house - having a mortgage at your age is a good thing. From now on, put the maximum amount you can each year into 401Ks and IRAs, selling some of the windfall account if necessary.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by gwe67 »

illumination wrote: Thu Jul 29, 2021 4:21 pm Real shame it wasn't purchased in a Roth IRA.
The Roth IRA limit was only $2,000 in 1998.
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Luckywon
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Luckywon »

California taxes capital gains as regular income.

Not that I'm suggesting you do so, but if you were to sell your entire position this year, here is a rough estimate of what could be the tax implications, from a tax calculator for 2021:

Assumptions: Wages $175k, 401k contribution $19.5k, no other deductions/income

Total tax including federal, CA, and payroll taxes: $39,495

Add 435k capital gains then total tax including federal, CA, and payroll taxes: $161,329

So you would pay about ($161,329-$39,495)/$435,000 = 28 % tax on the capital gains. This would reflect a combination of federal capital gains tax (marginal rate 20%), NIIT, and California tax.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by MahoningValley »

You are young and are in no rush to do anything. You need to educate yourself. In the meantime, would you be comfortable with opening a brokerage account under your wife's name and moving shares into that account. Then moving shares into ROTH Ira accounts annually for both of you from your respective taxable accounts. Maybe starting 401K accounts at work, and maxing them out. Liquidate shares slowly for day to day expenses and pay LT capital gains while lowering you income taxes AGI. Just spitballing here.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by finite_difference »

I would liquidate it, pay my tax bill, and use the remainder to buy VTSAX. Maybe set aside a few $k to pay for some classes in some activities you and your family members enjoy or are interested in learning like a sport or musical instrument.

Max your Roth IRA and 401k accounts by selling the VTSAX as needed.

I’d rather pay taxes and make a lot of money than pay zero taxes and lose it all.
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anon_investor
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by anon_investor »

#1 THANK YOUR FATHER.

I didn't see anyone else post that.

Like others have said, sell out of the position without impacting tax bracket too badly.
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arcticpineapplecorp.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by arcticpineapplecorp. »

gwe67 wrote: Thu Jul 29, 2021 5:47 pm
illumination wrote: Thu Jul 29, 2021 4:21 pm Real shame it wasn't purchased in a Roth IRA.
The Roth IRA limit was only $2,000 in 1998.
not to mention that the OP would have had to have earnings in 1998 equal to the Roth limit at that time. Was he old enough to work? If he's in his early 30's now and 1998 was 23 years ago...well, you can do the math.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by tomsense76 »

anon_investor wrote: Thu Jul 29, 2021 6:17 pm #1 THANK YOUR FATHER.

I didn't see anyone else post that.

Like others have said, sell out of the position without impacting tax bracket too badly.
+1

I think the next step is to do a bit of planning. Reading this wiki page on managing windfalls is helpful and a good place to start. As you said, you went from just starting out to advanced pretty fast. So I'd hold off doing anything major until you have a chance to get a bit of a plan.

Agree with others you will want to exit this position. Having all of your wealth concentrated in one stock is very risky. That said, where exactly that money goes is up to you to decide. In your 30s there are a lot of things needing funding: retirement, housing, kids, etc.. Where you put this money next, depends a bit on what the rest of your plan looks like. The previously linked page gets into planning and links to other resources about planning.

As others have said, there are a few different account types at Merrill. There is an advisor service, which is kind of expensive. So would steer clear of that. There is Merrill Edge Self-Directed. This is basically an online brokerage platform similar to others. One can buy and sell at their own discretion. If you stay at Merrill, would make sure you are in Merrill Edge Self-Directed. If you decide to leave, would look at Fidelity, Schwab, Vanguard, etc. There are other ones, but those 3 are pretty good starting out and have good customer service. Also for whatever brokerage you go to, would ask if they will give you some kind of signup bonus. They may give you $1000 for simply moving this position over.

When exiting the position, will want to look at cost basis and estimate taxes. If you can do that yourself, great! If not, get an accountant. It will cost a few hundred dollars, which is likely peanuts compared to the tax bill they will save you on.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by MrJedi »

If you regularly give cash gifts to any charities, you can consider opening a DAF and offloading a chunk of shares there and give from the DAF for awhile instead of your own cash.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by mighty72 »

#1 Thank You Dad
#2 sell
#3. Take the money to low cost broker and invest in low cost total market fund

You didn't even know you had this money till recently. Even with 28% tax, it is a nice sum

I would not stay concentrated in one stock for longer than needed.

Just my opinion
Luckywon
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Luckywon »

Luckywon wrote: Thu Jul 29, 2021 5:47 pm California taxes capital gains as regular income.

Not that I'm suggesting you do so, but if you were to sell your entire position this year, here is a rough estimate of what could be the tax implications, from a tax calculator for 2021:

Assumptions: Wages $175k, 401k contribution $19.5k, no other deductions/income

Total tax including federal, CA, and payroll taxes: $39,495

Add 435k capital gains then total tax including federal, CA, and payroll taxes: $161,329

So you would pay about ($161,329-$39,495)/$435,000 = 28 % tax on the capital gains. This would reflect a combination of federal capital gains tax (marginal rate 20%), NIIT, and California tax.
To sell or how to sell :twisted: Follow up to see potential tax saved if you split the $435k capital gains over two years:

Add 217.5K capital gains each year 2021 and 2022. Assume 2022 other income, contributions and tax rates the same as 2021. Then total tax each year 2021 and 2022 including federal, CA, and payroll taxes: $97,022

So you would pay about ($97,022-$39,495)/$217,500 = 26.4 % tax on the capital gains each of the two years.

If you split the the capital gains over 2021 and 2022, then total tax paid in 2021 and 2022 would be $194,044. (If you took all the capital gains in 2021, your total tax paid in 2021 and 2022 would be $200,824.) You might save roughly $6780 in taxes by splitting the gains over two years.

Take all these calculations with a grain of salt. I'm not a financial professional.
core4portfolio
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by core4portfolio »

sell only the amount until which you are ROTH eligible for current year so that you dont need to roll back your roth contribution.

" Married taxpayers filing jointly can contribute limited amounts if their MAGIs are from $196,000 to $206,000."

if you exceed then you have do backdoor however its complex if you contributed to ROTH for this year already
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AquaBliss
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by AquaBliss »

Sheesh you lost almost $10k today just while we were typing our replies.
Luckywon
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Luckywon »

AquaBliss wrote: Thu Jul 29, 2021 11:12 pm Sheesh you lost almost $10k today just while we were typing our replies.
My tax projections obsolete already! :oops:
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ORLYwindfall
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by ORLYwindfall »

Thank you all for your great responses thus far! These answers are helping my formulate an actual, concrete plan.

My first thought upon receiving the news was "oh my God! I have to diversify this immediately!" And my second thought was "oh my God! I don't even know how to do that!" So this is all a big help.
tomsense76 wrote: Thu Jul 29, 2021 8:11 pm As others have said, there are a few different account types at Merrill. There is an advisor service, which is kind of expensive. So would steer clear of that.
From what I can tell, the Merrill account is just a place where the money is being parked. It's not an AUM and I seem to have access to Merrill Edge with my login credentials (though I haven't tried actually using the Edge services to check that they work). However, I will look into transferring to a Schwab or Fidelity account as those seem more aligned with my future investing interests.

And yes, the first order of business was thanking my dad! He did a great job by setting and (literally) forgetting the stock purchase.
DonFifer
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by DonFifer »

Does your wife's 401K allow for after tax contributions? If a mega Roth is possible, have her max out her 401K and sell enough of the windfall to reimburse her as needed and cover the taxes.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Grt2bOutdoors »

illumination wrote: Thu Jul 29, 2021 4:21 pm There's no way to dodge the tax if its in your name and not in a retirement account. Real shame it wasn't purchased in a Roth IRA.

I would take it out of Merril Lynch as you're likely paying an AUM fee for them to be a custodian of a single stock. Somewhere like Schwab or Fidelity would be free.

You're going to have to make the call whether you should sell all of it and just take the tax hit in order to diversify. The standard Boglehead response would say yes, you should sell, pay the tax, and move the proceeds to something more diversified as single stock risk with a large part of your net worth is extremely risky.

Since the money is fungible, you can now every year max your retirement accounts and take a tax break every year by making those contributions.
How many 7-10 year olds do you know in 1998 who had “earned income”. Wishing it to be in a Roth IRA account is like wishing you found $441k in cash but it’s not relevant to this situation, it’s not often one wakes up and finds $440k in any account with zero work on their part.

The OP should investigate if there was any ividend reinvestment, if were taxes were paid on that then it becomes part of the basis and would lower potential tax burden.

No tax adviser would arbitrarily say sell it all in a lump sum if the sale would throw you into a much higher tax bracket but that is a call the OP needs to make. Income over $250k I believe is subject to an additional 3.8 percent tax plus the .09% Medicare surcharge in addition to the capital gains tax which will be 20 percent if you sell the entire block of stock. The OP may want to consider a periodic sale over a year or two to lessen the cost of taxation, especially if prospects for O Reilly remain good. Good choice by the OPs father.
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Boglegrappler »

It's worth reiterating the several incorrect points above regarding IRAs, roth or otherwise.

1. You have to have wage income to contribute to an IRA. So usually children can't do it or have their parents do it for them.

2. You have to contribute cash. You can't contribute appreciated securities or even non-appreciated securities to an IRA or 401k account.


O Reilly is pretty interesting. They've had some pretty good years recently, and have contracted their shares from 90 million in 2017 to 70 million or so today, which has been a nice boost to earnings per share when added to the other growth they've been experiencing. They haven't added a ton of debt to do it, and their same store sales numbers have been good, and they're growing their store count annually by about 4% or so.

I wouldn't panic out of this. Just slowly work your way to where you want to be. If you're in a charitable giving mode anyway, you can give appreciated securities and get the full deduction for the value while avoiding paying the gains taxes.

Good luck.
Gundy
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by Gundy »

I own 500 shares of ORLY (bought in 2003 at $16 p/shr). That's a 37-bagger. $0 taxes paid. 0.00% expense ratio.

I have no plans to sell. O'Reilly's market cap is $41B- many years of growth ahead.

The management team is top-notch.
"I look at a hundred deals a day. I pick one." -Gordon Gekko
cas
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by cas »

ORLYwindfall wrote: Thu Jul 29, 2021 4:06 pm
  • Are there any tax implications I need to be aware of now that I am in full possession of these shares?
Main point: You will want to pull every bit of cost basis and transaction information about this stock onto your own computer *before* you even think about moving to another brokerage. There is a steady stream of posts in these forums from people who say "I have this old stock I want to sell, I have no idea what the cost basis is, and I have no records from the original brokerage. Help!"

Long version:

For shares purchased prior to 2012, the *taxpayer* was/is responsible for maintaining "cost basis" records for the shares. Cost basis is what was paid for the stock. These shares purchased prior to 2012 are called "uncovered" shares by the IRS. You will need this "cost basis" information to report on your tax return when you sell shares, in order to let the IRS know that you do not owe taxes on the cost basis portion of the sale. (Capital gains = sale price - cost basis. Capital gains are taxed in the year of sale. Cost basis is not (because those dollars were already taxed before your father used them to buy the shares.))

If you want to give yourself a head's up on the type of information that the IRS will want after a sale of stock shares, Form 8949 is the form that will be filled out at tax time after a sale: https://www.irs.gov/pub/irs-pdf/f8949.pdf . ( The IRS Publication that covers tax issues related to stock ownership is IRS Publication 550 "Investment Income and Expenses") : https://www.irs.gov/publications/p550 .)

In your case, the cost basis would be the amount your father paid for the original shares, plus any dividends that were reinvested into more ORLY. (However, google seems to think ORLY has not issued a dividend during the time you owned it, so, if google is correct, reinvestment of dividends is a complication you do not have.)

For uncovered shares, your brokerage (ML) might show you the cost basis when you look online, but that is only as a service. They will not provide this information for you to the IRS when you sell the shares (but the IRS will insist on having it from you when you file your taxes.) If you transfer to another brokerage, the cost basis information for uncovered shares might or might not correctly transfer as well.

For what it is worth, for shares purchased 2012 and after, the brokerage is responsible for maintaining cost basis records. These are called "covered" shares.


---------------------------------------------------------

Some other tax notes:

As other people have noted, capital gains are taxed in their own special *federal* brackets (0%, 15%, 20%). (Many states tax capital gains the same as salary income. I think CA is one of them.) More information: https://www.nerdwallet.com/article/taxe ... -tax-rates

These special capital gains tax brackets interact with your "ordinary" income that is taxed at the more familiar 12% -> 22% -> 24% etc rates. Basically, the capital gains income "floats on top" of the ordinary income, but a picture is worth a thousand words for the concept. Useful tax visualization tool: https://engaging-data.com/tax-brackets/

In addition to the 0% -> 15% -> 20% brackets for capital gain income, there is another tax, called the Net Investment Income Tax (NIIT), that kicks in on capital gains income once your Adjusted Gross Income exceeds $250,000 (married filing jointly). NIIT is an additional 3.8%.

So, one of your options would be to sell over several years, staying underneath that $250,000 AGI limit each year, in order to avoid the additional NIIT 3.8%. This would need to be balanced with considerations of the riskiness of staying in a single concentrated stock position. But I mention it so that you won't be surprised by it. (I noticed several previous commentators said you would be taxed 15% on all capital gains if you sold everything in one year. I don' t think this is true. You would be taxed 15% on part of it, 18.8% on part of it (15% + 3.8%), and I think 23.8% on part of it (but I didn't do the math adding together your salary income plus potential capital gains income to confirm that you went into the 23.8% capital gains tax bracket.).)

Unfortunately, the tax visualizer tool mentioned above doesn't show NIIT.

Even if you decide you want to diversify out of the single stock rapidly, you could avoid incurring any of the 23.8% rate by spreading the sales over 2 tax years.

Before selling, it is also highly advised to run some test scenarios in some robust tax software (last year's Turbotax,etc), just to make sure that your family doesn't have some unexpected additional tax or loss of credit that shows up in a high income range that you have never been in before.

  • Is there a way to use a Roth IRA to my advantage in this situation? I do not currently have one.

One item to note is that you (and wife) are ineligible to make *direct* contributions to a Roth IRA if your MFJ income is above a certain point. ($198,000 Adjusted Gross Income for Married Filing Jointly for 2021). There are ways around that limit (the "backdoor Roth" process endlessly discussed on these forums), but I just wanted to mention the limit, since significant realized capital gains would likely push you into an income range you have never been in before, and the Roth contribution income restriction might catch you off guard.
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retiredjg
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by retiredjg »

ORLYwindfall wrote: Fri Jul 30, 2021 1:12 am From what I can tell, the Merrill account is just a place where the money is being parked. It's not an AUM and I seem to have access to Merrill Edge with my login credentials (though I haven't tried actually using the Edge services to check that they work). However, I will look into transferring to a Schwab or Fidelity account as those seem more aligned with my future investing interests.
Do not even think of moving this money anywhere until you have a complete recored of the cost basis of every share. Only ML has that information. In fact, since the account is not an AUM account, I don't see a need to move at all. But you certainly could once the cost basis is documented.

When you sell stocks, you are selling individual shares. Each share has a "basis" - in very simple terms, the basis is what the share cost. If it originally cost $5 and you sell for $15, you have a taxable capital gain of $10.

If you held that share one year or less, the gain is "short term" and will be taxed at your ordinary income rate (presumably 22% right now).

If you held that share more than a year, the gain is "long term" and will be taxed at a lower long term captal gains rate (presumably 15% as long as your total income is less than $250k).

There is another way to do this and that is to sell the shares using an "average basis". In a case like that, you just sell shares and they are all considered to have the same basis (even though in reality they all cost different amounts). Since the account is older and many splits have occurred, I wonder if using the average basis approach will be easier.

I know it is outside your understanding at this point, but pay close attention to cas's post just before this one. Keep reading it until you understand and ask questions about the parts you do not understand.

Getting diversified will be an important goal for the long run. For the short run, you need to gather the cost basis information and you need to start understanding the tax ramifications of selling this windfall. If you rush this to have money to put into Roth IRA or ff you rush toward diversification, you may end up causing yourself more problems down the road.
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illumination
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by illumination »

Grt2bOutdoors wrote: Fri Jul 30, 2021 5:53 am
illumination wrote: Thu Jul 29, 2021 4:21 pm There's no way to dodge the tax if its in your name and not in a retirement account. Real shame it wasn't purchased in a Roth IRA.

I would take it out of Merril Lynch as you're likely paying an AUM fee for them to be a custodian of a single stock. Somewhere like Schwab or Fidelity would be free.

You're going to have to make the call whether you should sell all of it and just take the tax hit in order to diversify. The standard Boglehead response would say yes, you should sell, pay the tax, and move the proceeds to something more diversified as single stock risk with a large part of your net worth is extremely risky.

Since the money is fungible, you can now every year max your retirement accounts and take a tax break every year by making those contributions.
How many 7-10 year olds do you know in 1998 who had “earned income”. Wishing it to be in a Roth IRA account is like wishing you found $441k in cash but it’s not relevant to this situation, it’s not often one wakes up and finds $440k in any account with zero work on their part.

The OP should investigate if there was any ividend reinvestment, if were taxes were paid on that then it becomes part of the basis and would lower potential tax burden.

No tax adviser would arbitrarily say sell it all in a lump sum if the sale would throw you into a much higher tax bracket but that is a call the OP needs to make. Income over $250k I believe is subject to an additional 3.8 percent tax plus the .09% Medicare surcharge in addition to the capital gains tax which will be 20 percent if you sell the entire block of stock. The OP may want to consider a periodic sale over a year or two to lessen the cost of taxation, especially if prospects for O Reilly remain good. Good choice by the OPs father.

Surprised at the outrage for simply wishing this "forgotten account" had been in a Roth IRA. Its obviously not the reality of the situation anyway, why go into all sorts of "this is why that could never happen and you shouldn't bring it up!!!" We already know it didn't happen.

As far as "no tax adviser would ever say to sell it all in a lump sum if the sale would throw you into a much higher tax bracket" that's simply not true, I remember my father decades ago worked for General Electric and he still had a large amount of his company stock. This went all the way back from the 1960's. An estate and tax advisor twisted his arm to sell it because it was such a large part of his net worth, he finally relented and it was right before the stock cratered. Glad he paid the tax on that one. My CPA repeatedly tells clients that can't sell an investment that's gone up (that they want to unload) but don't want to pay the tax man, that there's an easy way to avoid paying taxes and that's to instead lose money on the investment. He advises usually to sell even with the hit.

If I had the same stock position as the OP, I would not sell it, but that's because it doesn't make up the bulk of my net worth. I have a similarly large position in Procter and Gamble that was given a long time ago. I'm okay with the risk, but I'd obviously prefer it be in an index fund and if it was a retirement account, I would have already converted it.

For someone though where this is the overwhelming majority of their net worth, I would advise to aggressively sell even if it bumped me up into the top capital gains bracket in a single year. Even pretty bulletproof companies (see the General electric example) can fall apart quickly. The price went down close to 70% in a single year, I never would have guessed that. I happen to think O'Reilly will continue to do well, especially right now where people are being forced to keep their cars longer and the repair business is doing well. But nobody knows nothing.
alfaspider
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by alfaspider »

illumination wrote: Fri Jul 30, 2021 11:30 am
Grt2bOutdoors wrote: Fri Jul 30, 2021 5:53 am
illumination wrote: Thu Jul 29, 2021 4:21 pm There's no way to dodge the tax if its in your name and not in a retirement account. Real shame it wasn't purchased in a Roth IRA.

I would take it out of Merril Lynch as you're likely paying an AUM fee for them to be a custodian of a single stock. Somewhere like Schwab or Fidelity would be free.

You're going to have to make the call whether you should sell all of it and just take the tax hit in order to diversify. The standard Boglehead response would say yes, you should sell, pay the tax, and move the proceeds to something more diversified as single stock risk with a large part of your net worth is extremely risky.

Since the money is fungible, you can now every year max your retirement accounts and take a tax break every year by making those contributions.
How many 7-10 year olds do you know in 1998 who had “earned income”. Wishing it to be in a Roth IRA account is like wishing you found $441k in cash but it’s not relevant to this situation, it’s not often one wakes up and finds $440k in any account with zero work on their part.

The OP should investigate if there was any ividend reinvestment, if were taxes were paid on that then it becomes part of the basis and would lower potential tax burden.

No tax adviser would arbitrarily say sell it all in a lump sum if the sale would throw you into a much higher tax bracket but that is a call the OP needs to make. Income over $250k I believe is subject to an additional 3.8 percent tax plus the .09% Medicare surcharge in addition to the capital gains tax which will be 20 percent if you sell the entire block of stock. The OP may want to consider a periodic sale over a year or two to lessen the cost of taxation, especially if prospects for O Reilly remain good. Good choice by the OPs father.

Surprised at the outrage for simply wishing this "forgotten account" had been in a Roth IRA. Its obviously not the reality of the situation anyway, why go into all sorts of "this is why that could never happen and you shouldn't bring it up!!!" We already know it didn't happen.

As far as "no tax adviser would ever say to sell it all in a lump sum if the sale would throw you into a much higher tax bracket" that's simply not true, I remember my father decades ago worked for General Electric and he still had a large amount of his company stock. This went all the way back from the 1960's. An estate and tax advisor twisted his arm to sell it because it was such a large part of his net worth, he finally relented and it was right before the stock cratered. Glad he paid the tax on that one. My CPA repeatedly tells clients that can't sell an investment that's gone up (that they want to unload) but don't want to pay the tax man, that there's an easy way to avoid paying taxes and that's to instead lose money on the investment. He advises usually to sell even with the hit.

If I had the same stock position as the OP, I would not sell it, but that's because it doesn't make up the bulk of my net worth. I have a similarly large position in Procter and Gamble that was given a long time ago. I'm okay with the risk, but I'd obviously prefer it be in an index fund and if it was a retirement account, I would have already converted it.

For someone though where this is the overwhelming majority of their net worth, I would advise to aggressively sell even if it bumped me up into the top capital gains bracket in a single year. Even pretty bulletproof companies (see the General electric example) can fall apart quickly. The price went down close to 70% in a single year, I never would have guessed that. I happen to think O'Reilly will continue to do well, especially right now where people are being forced to keep their cars longer and the repair business is doing well. But nobody knows nothing.
As a tax professional, I often have to remind people not to let the tax tail wag the dog. At the end of the day, the underlying economics are what matters. That said, sometimes you may be willing to take some economic risk for tax reasons. But holding onto a single stock forever for fear of capital gains tax is not a sound tax strategy. In some cases it may make sense to spread out a liquidation over multiple tax years, but you are taking some economic risk from doing so.
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nvboglehead
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by nvboglehead »

I would certainly not want to pay the high state income taxes to CA on that gain. It would be a motivation for me to move to a state without an income tax, like TX, NV, WY, FL, etc. After I had established residency, I would sell the shares and diversify my capital into the markets in a Bogleheadish fashion.

Full disclosure: I am a native CA person who fled that state for NV many years ago. My partner and I have never regretted our move. Avoiding a 9.3% or higher tax is a big deal.

Cheers,

Dale
Learn from the Bogleheads! Do you want to work for your money or have your money work for you?
alfaspider
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by alfaspider »

nvboglehead wrote: Fri Jul 30, 2021 11:44 am I would certainly not want to pay the high state income taxes to CA on that gain. It would be a motivation for me to move to a state without an income tax, like TX, NV, WY, FL, etc. After I had established residency, I would sell the shares and diversify my capital into the markets in a Bogleheadish fashion.

Full disclosure: I am a native CA person who fled that state for NV many years ago. My partner and I have never regretted our move. Avoiding a 9.3% or higher tax is a big deal.

Cheers,

Dale
It is, but again I would tell people not to let the tax tail wag the dog. $40k is a lot of money in the short term, but ultimately a pretty minor consideration in terms of where someone might want to live long-term, as that can effect things like earning potential as well as family relationships. I might have a different opinion if this were "retire wealthy" money, but this is on the order of "house money."
sfmurph
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Re: Single stock non-inheritance windfall – $440k of ORLY all in my name

Post by sfmurph »

ORLYwindfall wrote: Fri Jul 30, 2021 1:12 am
tomsense76 wrote: Thu Jul 29, 2021 8:11 pm As others have said, there are a few different account types at Merrill. There is an advisor service, which is kind of expensive. So would steer clear of that.
From what I can tell, the Merrill account is just a place where the money is being parked. It's not an AUM and I seem to have access to Merrill Edge with my login credentials (though I haven't tried actually using the Edge services to check that they work). However, I will look into transferring to a Schwab or Fidelity account as those seem more aligned with my future investing interests.

And yes, the first order of business was thanking my dad! He did a great job by setting and (literally) forgetting the stock purchase.
You should consider staying with Merrill Edge (if that is the account). With over $100K in assets there, you meet the criteria for "preferred" status, which gives you BofA credit cards w/ 2.65 - 5% cash back, and a discount on mortgage rates. As long as you're not paying an AUM fee, you have some time to decide what to do.
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