Too Much Employer Stock? How to Diversify a Concentrated Position

Suppose an engineer has $500,000 in investments, and $200,000 of it is shares of the company that pays her salary. Her paycheck, her bonus, her health insurance, and 40 percent of her net worth all depend on one business. If that company's stock fell by half, the portfolio would lose $100,000, a 20 percent hit to the whole account. If the same bad news also led to layoffs, she could lose that income at the same time. The numbers in this example are illustrative, but the pattern is common among people who receive stock awards, buy through an employee plan, or simply held on as the shares rose.

This guide is general education, not personalized advice. It explains how to measure the problem, what the main ways of reducing it cost in taxes, how a special rule for 401(k) company stock works, and how to turn a large position into a calendar of smaller, manageable steps.

Start with the total, not the account

The first step is counting everything. FINRA, the securities industry regulator, advises employees to include company stock held in a 401(k) along with shares in a taxable brokerage account, stock awards, and options when judging how diversified they are. Funds can hide overlap too, because a broad fund may hold your employer as one of its larger positions.

FINRA also says there is no single formula or percentage that suits every investor, and as a regulator it does not give that sort of advice. It notes that some experts suggest keeping no more than 10 percent of total investment assets in any single stock, including your employer's, and that even 10 percent could be too high depending on your goals and circumstances. Treat the 10 percent figure as a reference point for a conversation, not a rule.

A useful test is to ask two questions. If this stock fell 50 percent, could I still reach my goals? And if my job disappeared at the same moment, what would I live on? If either answer is uncomfortable, the position is probably larger than your plan can absorb.

The tax bill is the usual reason people wait

Most people do not hold concentrated stock out of conviction. They hold it because selling creates a tax bill. The IRS treats stock as a capital asset, and the gain is the sale price minus your adjusted basis, which is generally your cost. Shares held more than one year produce long-term gains, taxed at lower rates, while gains on shares held one year or less are taxed as ordinary income.

For 2026, the long-term capital gains rate is 0 percent when taxable income is at or below $49,450 for single filers and $98,900 for married couples filing jointly, according to Revenue Procedure 2025-32. The 15 percent rate applies up to $545,500 for single filers and $613,700 for joint filers, and 20 percent applies above those amounts. A separate 3.8 percent net investment income tax can also apply when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers, as IRS Topic 559 explains.

Consider an illustrative position of 1,000 shares bought at an average of $50 and now worth $150, a $100,000 gain. Selling it all in one year could push part of the gain into a higher bracket, and it adds to income that might trigger the extra 3.8 percent tax. Selling 250 shares a year over four years would spread the same gain into $25,000 slices, which may keep more of it in lower brackets. The tradeoff is that you carry the risk for four more years, so many people accept some tax cost in exchange for faster risk reduction.

RSUs and stock awards are different

Not every share carries a big built-in gain. Under IRS Publication 525, restricted property you receive for your services is generally included in income at its fair market value when it becomes substantially vested, and your holding period begins at that point. Restricted stock units commonly work this way, though the details depend on your award agreement. That value effectively becomes your basis. If you sell right away, you owe little additional tax beyond the income already taxed, because the sale price is close to the basis.

That makes selling at vesting one of the simplest diversification tools. Some people sell a fixed share of each vest automatically and treat the remaining shares as a bonus, so the position never grows beyond what they chose.

Beware the wash sale rule if you sell at a loss. Under IRS Publication 550, you cannot deduct a loss if you buy substantially identical stock within 30 days before or after the sale. The IRS gives the example of an employee who receives stock as a bonus, sells at a loss, and then receives another bonus award within 30 days. The loss is disallowed and added to the basis of the new shares.

Choosing which shares to sell

Long-held employees often own several lots of the same stock bought or granted at very different prices. IRS Publication 550 says you can figure your cost basis by specific share identification, if you adequately identify the shares you sold, or by first-in, first-out. The choice can change the tax bill substantially.

Take an illustrative case of two lots: 100 shares with a basis of $20 each and 100 shares with a basis of $140 each, with the stock now at $150. Selling 100 shares from the cheaper lot produces a $13,000 gain. Selling 100 from the higher-basis lot produces a $1,000 gain. Both sales cut the position by the same amount. Identifying the lots in advance with your broker, and checking the holding period, lets you reduce risk while limiting the tax cost in the early years.

The special rule for company stock inside a 401(k)

If your 401(k) holds your employer's shares, a rule called net unrealized appreciation, or NUA, can change the tax math. IRS Publication 575 explains that when you receive employer securities from a qualified plan as part of a lump-sum distribution, tax on the NUA can be deferred until you sell. The NUA is the increase in the shares' value while they were in the plan.

A lump-sum distribution, for this purpose, is the payout of your entire balance from all of the employer's plans of one kind within a single tax year. It must be paid because of death, after age 59½, because you separated from service, or after disability for a self-employed person. The shares must be distributed in kind, and the NUA is reported in box 6 of Form 1099-R.

Here is an illustration with round numbers. Say the plan's cost basis in the shares is $60,000, and they are worth $300,000 when distributed. You owe ordinary income tax on the $60,000 in the year of distribution. The $240,000 of NUA is not taxed until you sell, and then it is long-term capital gain regardless of how long you hold the shares after distribution. Growth after the distribution is long-term or short-term depending on how long you hold the shares afterward.

To see why this matters, assume flat rates for simplicity. At a 24 percent ordinary rate, withdrawing $300,000 from an IRA would cost $72,000. With NUA treatment, 24 percent on $60,000 plus 15 percent on $240,000 comes to $14,400 plus $36,000, or $50,400. That is a $21,600 difference in this example, before considering the bracket stacking that real returns involve.

The downsides are real. You pay tax on the basis now, instead of deferring it through an IRA rollover, and if you are under 59½ the 10 percent additional tax on early distributions can apply to the taxable amount. IRS Topic 558 lists an exception for distributions after you separate from service in or after the year you turn 55. NUA also means holding a large stock position in a taxable account, which is the concentration you were trying to reduce. This is a decision to model with a qualified tax professional before triggering the lump-sum.

Giving, gifting, and other tools

If you give to charity, donating appreciated shares you held for more than a year can avoid the capital gain on those shares. Under IRS Publication 526, contributions of capital gain property are generally deductible at fair market value, subject to the percentage-of-income limits that apply to that type of property and organization.

Other strategies exist, including exchange funds and hedging arrangements, but they carry costs, restrictions, and complexity that fall outside this article. FINRA's investor materials focus on the basics: diversify across and within asset classes, look under the hood of funds for overlap, and rebalance on a schedule.

Where the money goes after the sale

Selling is only half the move. If the proceeds sit in cash for months, you may drift back toward the stock out of regret or simply miss the market. FINRA suggests spreading money across and within asset classes, such as stocks, bonds, and other holdings, and using broad funds to get diversification without picking replacements one by one.

Be careful not to rebuild the same exposure through a side door. A sector fund that is heavily weighted toward your industry can recreate the original risk, and your employer may already be a top holding in the index funds you own. Compare your fund holdings with the company before choosing replacements.

Also match the money to your goals. If the proceeds are for a house in two years, a stock fund is the wrong destination whatever its diversification. If they are for retirement decades away, a long-term mix fits better. Decide the destination first, and the position becomes easier to sell.

What insiders can and cannot do

If you are a director or executive, selling is constrained by securities law and company policy. A Rule 10b5-1 plan lets insiders set up trades in advance, as a defense against insider trading claims. Since the SEC's 2022 amendments, directors and officers must wait a cooling-off period before trading begins, which is the later of 90 days after adoption or two business days after the company discloses results for that quarter, capped at 120 days. Other persons generally face a 30-day wait. Directors and officers must also certify that they are not aware of material nonpublic information and are adopting the plan in good faith.

Most employees are not insiders, but they still face blackout periods and trading windows set by their company. Check your company's insider trading policy before you sell, and if you handle material nonpublic information, get guidance first.

Turning one big decision into a schedule

The practical answer is usually a schedule. Choose the percentage of your portfolio you can live with in one stock. Subtract your current holding to get the amount to reduce. Then divide the amount into tranches, such as quarterly sales timed to windows or vests.

Direct each sale to a diversified fund so the proceeds are not simply parked. Use tax-loss opportunities in other holdings to offset gains, remembering that net capital losses can offset $3,000 of other income per year, according to IRS Topic 409. Revisit the plan each year.

Writing the plan down matters more than the exact percentage. A rule you set when the stock is calm is easier to follow than a decision you make when it drops.