P&G Retirement Plans

P&G currently offers two active retirement plans — a 401k Savings Plan (the 401k plan) and the Procter & Gamble Profit Sharing Plan, sometimes referred to as the Profit Sharing Trust (the PST).

The 401k plan is quite straight-forward. It has no employer match, but is well-diversified and offers low-cost investment options. On the other hand, the PST provides significant employer contributions, but invests almost entirely in P&G stock. This exposes participants to elevated levels of concentration risk. But you’ve probably heard that many times already.

Generous contributions, along with the positive performance of P&G stock, have enabled many P&G employees to retire very comfortably. But as the company stock price continues to trend upward, we’ve been fielding a variety of questions from PST plan participants who are contemplating an exit from the plan.

No matter where you are in your career progression, you’ll eventually need to decide how to distribute the assets in your P&G retirement plans—either when you retire or when you change employers. And taking a distribution can mean facing a sizable tax bill.

But here’s the thing: there is a way to minimize that tax bill. It’s all about how you take that distribution.

In this whitepaper, we’ll walk you through your options and how to determine the best option for you. And every step of the way, we’re committed to keeping this simple.

Let’s get started.

 What Are My Options?

Participants have four options when taking a cash flow distribution from the PST.

OPTION 1:

You can leave your assets in the plan. Very few people opt to do this. Although you maintain flexibility with your investment options and keep management costs to a minimum, you’ll still be highly concentrated in P&G stock.

OPTION 2:

You can opt to receive an individual annuity. Again, very few people choose this option. A guaranteed income stream sounds great, but that income will be taxed at a higher rate since it is considered to be ordinary income. Couple that with related insurance costs, and this option quickly becomes less desirable.

OPTION 3:

You can rollover your assets into an IRA. Individual retirement accounts offer absolute flexibility for your investment choices. However, the distribution will be taxed at those higher ordinary income rates.

OPTION 4:

You can take a lump-sum distribution. With this option, you can convert ordinary income into capital gains income. Capital gains income is taxed at significantly lower tax rates.

Remember we said there is a way to minimize that tax bill? Well, when structured properly, this is it. That’s why the lump-sum distribution is the most popular option with P&Gers and the one we recommend most often.

More About Lump Sum

Google the phrase “lump-sum distribution” and the process quickly becomes overwhelming. You could literally spend days trying to decode concepts like net unrealized appreciation, cost basis accounting, distributions in-kind, holding periods, and irrevocable forfeits.

Here’s the idea in a nutshell.

But we manage lump-sum distributions every day and have a strategically sound approach for navigating the process for P&G retirees.

Because P&G securities have likely appreciated significantly during your tenure with the company, you may want to use what’s called net unrealized appreciation (NUA) tax treatment. This means you’ll prepay some tax at the ordinary income tax rate up front, but when you ultimately sell the shares, the much lower long-term capital gains tax rate will apply.

The maximum rate for federal capital gains tax is currently 20%. This is much lower than the current maximum tax rate for ordinary income of 37%. So the potential tax savings can be significant.

Of course, taxes shouldn’t dictate your investing decisions. It’s also important to consider other assets, cash flow needs, and long-term retirement goals. From there, you can decide if this tax strategy makes sense for you.