Category: Investment

You have company stock. That’s great! But just like any other financial asset, how you use it makes all the difference. Between the different types of company stock, vesting schedules, and portfolio allocation, there are many financial planning considerations to be aware of. Understanding how to reduce your tax bill on these assets can significantly enhance your financial outcome.

On top of all that, we can’t forget about taxes. Knowing how to reduce your tax bill effectively can lead to substantial savings. Whether it’s using a Section 83(b) election or watching your tax rates, there are a few taxation strategies you can use to maximize your employee stock options.

Here’s one more to add to your arsenal:

Net Unrealized Appreciation: A Key Tax Strategy

Have you heard of net unrealized appreciation (NUA)? You most likely haven’t, but it can make a significant difference when it comes to how to reduce your tax bill on your 401(k) distributions. This lesser-known strategy is a powerful tool when considering how to reduce your tax bill.

Simply put, NUA is the difference between the price of the stock when you got it and what it’s worth today. Using this approach can be a game-changer when it comes to how to reduce your tax bill.

How It Works to Reduce Your Tax Bill

You have a workplace retirement plan with a sizable amount of company stock. If you roll your 401(k) into an IRA, your stock appreciation will be taxed at ordinary income tax rates when you take a distribution. Those tax rates can be as high as 37%.

To learn how to reduce your tax bill, NUA to the rescue! This strategy allows company stock from a 401(k) to be split off from your other savings and rolled over to a taxable account so you can take advantage of capital gains taxes, which currently top out at 20%.

Do the Math to See Tax Savings

Want to see some numbers? Understanding the figures can clarify how to reduce your tax bill effectively.

Let’s imagine you have company stock with a cost basis of $100,000. After many years, that stock is now worth $400,000. Your NUA is $300,000. If you go the traditional route of rolling that $400,000 to an IRA and your tax rate is 37%, you will owe a whopping $148,000.

But if you use the NUA strategy and move the shares to a taxable account, you would pay income tax on the cost basis in the year you made the rollover, coming out to $37,000. If you then sold the shares and paid the 20% capital gains rate, you would owe another $60,000 on the NUA amount of $300,000 for a total of $97,000. That’s a tax savings of $51,000! How to reduce your tax bill is clear with strategies like NUA.

Is NUA Right For You?

Considering how to reduce your tax bill with the NUA strategy? If any of these situations apply to you, you are eligible:

• You are leaving or have left the employer you received your stock from.
• You are 59½ and your plan allows in-service distributions from your retirement plan.
• You have suffered a disability.
• You are a family member of someone with company stock who has passed away.

Beyond eligibility requirements, you will want to run some numbers based on your unique financial circumstances. Look at how much your stock has appreciated, what your current income tax bracket is, and if you can afford to pay income taxes on the cost basis of your stocks upfront. This planning is essential for anyone exploring how to reduce their tax bill effectively.

We Can Help You Reduce Your Tax Bill

NUA, along with other tax minimization strategies, has many ins and outs, and its success will depend on your situation and executing the transfer and sale properly. Learning how to reduce your tax bill through such strategies can provide significant financial benefits.

We are here to help you understand the net unrealized appreciation strategy and all the other aspects of financial planning for tech executives or those with company stock. Let us assist you in mastering how to reduce your tax bill effectively.

Schedule a quick call with us and see if we can help you make the most of your stock benefits.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

Everyone wants to be happier. Just look at the books lining the shelves at your local bookstore. You’ll see everything from The Happiness Project to The How of Happiness to Hardwiring Happiness.

While many people believe that their happiness will increase when they have more money, few people connect their employee stock compensation to happiness. However, understanding how stock compensation can impact your life is crucial.

Thanks to mystockoptions.com, we can see how stock compensation, if fully appreciated and understood, can improve your happiness.

Wealth Creation

When your company’s stock price goes up, your wealth increases, and increased wealth can improve your quality of life. But it’s about more than the number in your bank account, it’s about what you do with it.

If you use your increased wealth to fund your passions, pursue your dreams, and invest in others, it can improve your well-being and put you on the path toward greater happiness. Stock compensation is a powerful tool for wealth creation, directly impacting your financial stability.

Anticipating the Future

Sometimes planning for a trip or a big event is half the fun, as the sense of anticipation builds excitement.

The money you accumulate from your company’s stock plan can give you that same sense of anticipation as you plan how you will use the money and the difference it will make in your future.  

A Feeling of Being Special

Not everyone receives company stock. If you receive regular stock grants, that’s a benefit that should make you feel special. You can further your happiness by increasing your gratitude, appreciation, and enthusiasm about this benefit.

Receiving stock compensation often means being recognized for your contributions and feeling valued within your company.

Discount and Deals

Getting something valuable at a discount often conjures up feelings of pride and euphoria. If you are part of an employee stock purchase plan (ESPP) and have access to a discounted purchase price, you can experience those same emotions with your stock.

Stock compensation through ESPPs allows you to purchase stock at a discount, maximizing your financial benefits.

Control Over Taxes

While taxes are a necessary evil, stock options can give you the opportunity to delay an increase in income taxes. Managing the taxation of stock compensation is key to maximizing the benefits of your stock options.

Whether you receive a grant of stock options or stock appreciation rights or you’ve enrolled in an ESPP, you may be able to decide when to receive the income and pay taxes on it. Having control over something that you normally can’t control can make you feel empowered.

Donations And Gifts Of Company Stock

Studies have shown that generosity increases happiness. (1) To capture some of that happiness, consider donating appreciated company stock that you’ve held long-term.

This type of gift can make a significant difference for the organizations you support. As an added benefit, stock donations can also meaningfully lower your expected taxes. Using stock compensation for charitable contributions can enhance your sense of fulfillment and reduce your tax burden.

A Sense of Ownership

When you own company stock, you essentially own a piece of your company. Your ownership can make you happier since you share in the success the company gains from your work. Ownership gives you a sense of pride and control and possibly even some influence and input into your company’s operations.

Since we spend so much of our lives working, the ensuing happiness you feel from ownership at work will play a big role in your happiness in other areas of your life. Stock compensation fosters a sense of ownership, aligning your success with your company’s growth.

Stronger Relationships

Strong relationships make us healthier and happier, (8) and while it may seem odd to link stock compensation with relationships, the conversations you have with your colleagues about how to handle stocks and how you’ll use the gains can improve your friendships.

But be sure to turn to a professional as well. Your coworkers might be knowledgeable and well-meaning, but their advice and enthusiasm could lead to unnecessary risks, such as overconcentration in stock. The results of risky behavior often cause more stress than happiness. Discussing stock compensation with trusted financial advisors ensures that you manage it wisely and avoid potential pitfalls.

Financial Security

Imagine that you don’t have to worry about money anymore, that your finances are secure and the future is funded. That picture of financial security probably brings excitement and happiness.

stock compensationYour stock compensation can help you on the journey to financial security by bridging the gap between your Social Security benefits and other retirement accounts, thereby minimizing your stress and worry and increasing your confidence. Stock compensation can play a crucial role in achieving long-term financial security, providing a stable foundation for your retirement.

Mindfulness And Meaningfulness

It’s all too easy to get caught up in the daily minutiae of work, but keep a mindful perspective by remembering that your hard work can make a difference in elevating your company’s stock price.

This attitude increases ownership, engagement, optimism, and happiness by making your job even more meaningful and motivating you to reach new levels of personal and professional success. Understanding the impact of stock compensation on your overall well-being encourages a more mindful and fulfilling approach to your career.

Is Your Stock Making You Happier?

If you have company stock and aren’t experiencing the added happiness it can bring, Archer Investment Management can help you optimize your finances so that your stock options bring you more joy. Effective management of your stock compensation can significantly enhance your overall happiness and financial success.

Schedule a quick call with us and see if we can help you make the most of your stock benefits.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

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(1) http://time.com/4857777/generosity-happiness-brain/

(2) Relationships and Health

If you’re like other tech executives, you probably have your fair share of stock grants. Equity incentives are very popular these days but can be confusing—especially from a tax standpoint. Understanding the taxation of stock grants is crucial for managing your financial strategy effectively.

There are different kinds, various ways of taxing them, and even some little-known opportunities for minimizing taxes.

What Is A Section 83(b) Election?

Never heard of a Section 83(b) election?

You’re in good company; hardly anyone else has either!

However, it’s something that could potentially save you a lot of money on taxes, so you should be aware of it. In the context of taxation of stock grants, a Section 83(b) election can be a powerful tool.

Equity grants are considered taxable compensation, and a Section 83(b) election tells the IRS that you want to report income tax the year your stock is granted instead of waiting until it vests.

Normally, you don’t pay taxes until the stock vests and you actually take ownership of it. With an 83(b) election, you choose to pay taxes on the stock before it actually becomes yours.

The Risks & Rewards Of A Section 83(b) Election

Why would you choose to pay taxes on something that’s not actually yours yet? Because the tax bill might be a lot lower then!

The taxation of stock grants depends heavily on the fair market value of the stock. The taxes you pay are based on the fair market value of the stock.

When you are granted stock that doesn’t vest for 3 years, there is a good chance the price of the stock will increase during those 3 years.

The 83(b) election allows you to calculate your tax bill based on the lower stock price on the grant date rather than the higher price at vesting. The higher vesting price could also push you up into the next, higher tax bracket. In fact, tax rates could increase during those 3 years and you would end up paying a higher rate overall.

So, why wouldn’t you choose this option?

Well, there are a number of risks involved.

First of all, the taxes you pay are not refundable. If you leave your company before the stock vests, you will have paid taxes on stocks that you never received. A Section 83(b) election is nearly impossible to rescind or cancel once made. If you pay taxes early, you risk paying taxes that you will never actually owe.

Also, the stock price could go down between the grant and vesting date, which leaves you paying more taxes than you would have if you had waited.

Another risk is that the tax rates will go down, as they did with the Tax Cuts & Jobs Act. If you are married with a taxable income of $300,000, you would have gone from the 33% tax bracket in 2017 down to 24% for 2018.

That’s a big difference.

How A Section 83(b) Election Works

To make a Section 83(b) election, you have to contact your local IRS office within 30 days of the grant date. This is a critical step in managing the taxation of stock grants effectively.

Also, you will need to have enough cash up front to pay the taxes, since the stock is not yet yours to sell. Let’s take a look at how a Section 83(b) election would play out in real life.

Let’s say you are granted 3,000 shares when they are worth $15 each and you are in the 32% tax bracket. The shares vest after 3 years when they are worth $50, at which point you sell them with a capital gains rate of 18.8% (including the Medicare surtax).

This is what you would end up paying in taxes for each option:

This example results in a $13,860 tax savings with the Section 83(B) election.

If the income from the grant pushed you into a higher tax bracket, the savings would be even greater!

As you can see, an 83(b) election has the potential to save you a lot of money in taxes.

However, it is not without its risks.

Next Steps…

You don’t have to weigh the reward and risks of an 83(b) by yourself!

We are here to help you understand an 83(b) election and all the other aspects of financial planning for tech executives.

Discussing the taxation of stock grants and understanding how to manage it can save you substantial amounts in taxes. It is important to make an educated decision before the IRS window closes. You only have 30 days once the stock has been granted.

Schedule a quick call with Richard, at Archer Investment Management to discuss the pros and cons of making an 83(b) election for yourself.

You’ve got more to tackle on your to-do list than worry about how to make smart decisions with your money.

At Archer, we make managing your money easy, so you can get back to your life.

Not a tech executive? That’s okay! We can help you too.

Schedule a quick call with us and see if we can help simplify your finances.

ABOUT RICHARD

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

Credit should be given to Mystockoptions.com for some of the excellent content in this article.

Incorporating restricted stock and RSUs (restricted stock units) into your financial plan can get complicated. You will need to make plenty of decisions, such as how long you will hold your shares, if you should sell them and put them into an alternative investment, or if you will use the money to meet one of your financial goals. If your head is spinning, take heart. Here are 10 simple tips to help you maximize your restricted stock and RSUs.

RULE NO. 1: SET GOALS

In order to make the wise decisions, you need to determine what you hope your stock will do for you. When you eventually sell the shares, where do you want that money to go? How do your shares and their potential sale fit in relation to your other income, 401(k), and other savings?

RULE NO. 2: KNOW YOUR VESTING SCHEDULE

It is essential to know the dates your grants will vest since you will need to pay taxes on the resulting income. If you want to avoid a hefty tax bill, it requires some forethought.  Your vesting schedule will depend on your company and the conditions they place on the stock, but it is usually time-based, requiring you to work at the company for a certain period before vesting can occur.

RULE NO. 3: UNDERSTAND THE CONSEQUENCES IF YOU WERE TO QUIT

If you leave your company before your restricted stock vests, you will usually forfeit the unvested grants. There can be exceptions to this, so be sure to gather all the details from your company before you make the decision to leave. If you have a significant amount of shares that haven’t vested, it might be worth it to stay with your company long enough to benefit from this reward for your service.  

RULE NO. 4: CONSIDER TAXES

Your taxable income will be the market value of the shares at vesting and is subject to federal income tax, Social Security, and Medicare, plus any state and local tax. Your company may offer you a few ways to pay taxes at vesting, such as withholding shares for taxes, a sell-to-cover transaction for taxes of a portion of the shares, a salary deduction, or simply a check payment.  When you eventually sell the shares, you will pay capital gains tax on any appreciation over the market price of the shares on the vesting date.

RULE NO. 5: LOOK INTO AN 83(B) ELECTION

With restricted stock (not RSUs), you have the option to make a Section 83(b) election with the IRS within 30 days of the grant date. An 83(b) election allows you to pay taxes on the value of the stock at grant date rather than vesting date. If you believe the stock price will be higher on the vesting date and you are confident you will meet vesting requirements, this can be a beneficial move for you. Also, moving the time of taxation to the grant date starts the capital gains holding period earlier, which can make a difference at the eventual sale of the shares.

RULE NO. 6: WATCH YOUR TAX RATES

Be sure to anticipate what restricted stock and RSUs will do to your tax rates when you vest.

The extra income could push your income into a higher tax bracket, raise your rate of capital gains tax, and trigger extra Medicare taxes, possibly costing you thousands of dollars. If you plan ahead, you can implement strategies that could keep you in the lower tax brackets.

RULE NO. 7: DECIDE WHETHER TO HOLD OR SELL

Whether or not you sell your shares at vesting will depend on multiple factors, such as tax planning, financial planning goals, and company restrictions.  If you sell immediately, you can use the shares to pay for the taxes incurred at vesting. If you hold your shares, your capital gains tax will be affected when you sell in the future. Your decision may be influenced by your cash needs, upcoming life events, and other financial planning factors, including diversification, dividends paid on your stock, and alternative investments.  If your company is publicly traded, there can be blackout dates that prevent you from trading and stock ownership guidelines that require you to keep a certain amount of stock. With private companies, there are probably restrictions in your grant or SEC rules that will impact when you can sell.

RULE NO. 8: REMEMBER DIVIDENDS

Even though you can’t transfer or sell restricted stock until it vests, the stock is still issued to you and in your name, which means you could receive dividends. If you have unvested RSUs, this does not apply. But when a company pays dividends on outstanding shares of stock, it can choose to pay dividend equivalents on RSUs. These may be deferred or accrued to additional units and then settled when the unit vests.

RULE NO. 9: DON’T LET COMPANY STOCK SKEW YOUR PORTFOLIO

It’s a cliché, but when it comes to your portfolio, you don’t want to keep all of your eggs in one basket. You don’t want too much of your net worth tied up in your company stock, and since restricted stock and RSUs vest over time, it’s easy to miscalculate how much of your portfolio is reliant on the success of your company. In order to avoid overconcentration, work with a professional to determine how much your holdings in company stock contribute to your overall net worth.

RULE NO. 10: RELY ON A PROFESSIONAL

This stuff is complicated. Sound financial planning, investing, and tax management require specialized knowledge, skills, and experience. At Archer Investment Management, we specialize in serving tech executives with their financial planning needs. We understand your needs and complexities and are here to make sure your financial plan is airtight. If you have ESOs, restricted stock, or RSUs, don’t hesitate to reach out to us to help you maximize restricted stock units (RSUs) and incorporate them into your overall financial picture. Maximize restricted stock units (RSUs) to optimize your financial outcomes. Click here to schedule a phone call today!

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to technology executives. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

If you work for a large company, it’s likely that you have the opportunity to take advantage of a comprehensive benefits package. Understanding all of the perks that you are entitled to is crucial to your long-run financial success. One perk I’d like to highlight is Employee Stock Options (ESOs). Through my explanation of the ins-and-outs of ESOs, you will have a better understanding of how you can make the most of them.

WHAT ARE EMPLOYEE STOCK OPTIONS?

ESOs offer the holder the right to buy a certain amount of company shares at a predetermined price for a specified period of time. Employees are given a share in the potential growth of their company’s value, without actually risking their own money—until they decide to exercise their options and purchase shares of the company’s stock.

HOW DO EMPLOYEE STOCK OPTIONS WORK?

Let’s say you work for Company XYZ, and they have issued employee stock options to you at $50. In this scenario, you would have the right to purchase 1,000 shares of XYZ stock at $50 (the grant price) after three years (the vesting period) and within ten years (the expiration date) of the grant date.

Taking the example above, what happens if, after four years, the market price of XYZ is at $100? In this case, you can purchase 1,000 shares at $50, then sell them at the $100 market price—pocketing a $50,000 profit!

Alternatively, if after four years, the market price of XYZ is at $25? At this point, you would not have to buy the shares at a loss. Instead, you can wait until the 10-year expiration date for the stock price to potentially surpass the grant price.

WHAT ARE THE DIFFERENT TYPES OF EMPLOYEE STOCK OPTIONS?

There are two types of ESOs that a company can grant: (1) Non-qualified Stock Options (NQSOs) or (2) Incentive Stock Options (ISOs). NQSOs are the most common type offered by employers.

Non-qualified stock options (NQSOs) do not qualify for special tax treatment and result in additional taxable income to the recipient at the time that they are exercised, the taxable amount being the difference between the grant price and the market value on that date. In addition, when NQSOs are exercised, income, Social Security, and Medicare taxes will be withheld.

In contrast, Incentive Stock Options (ISOs) qualify for special tax treatment and are not subject to Social Security or Medicare withholding taxes.

WHAT IS THE TAX TREATMENT OF EMPLOYEE STOCK OPTIONS?

As discussed above, it is clear that NQSOs and ISOs are treated differently when it comes to taxation. However, for both types, the grant of the option itself is never considered a taxable event.

For NQSOs, taxation begins at the time that the option is exercised. Once exercised, the purchase of discounted stock is considered “compensation” and is taxed at ordinary income tax rates. When those purchased shares are sold, either short-term or long-term capital gains taxes may be owed. With short-term capital gains, the employee would be subject to tax at their ordinary income tax rates. With long-term capital gains, the tax would be significantly reduced.

Gains on ISOs are not subject to payroll taxes. However, ISOs are a preference item for the alternative minimum tax (AMT) calculation. Also, if you exercise your options and sell the stock within a year, you will pay ordinary income tax on the difference between the market price at sale and the grant price, much like the treatment of NQSOs.

When you exercise the ISO but hold the stock, tax treatment can get quite complicated. In this situation, the difference between the grant price and the market price then becomes an AMT preference item, so exercising ISOs might mean you’ll pay the AMT. If you hold the shares for one year from the exercise date (and two years from the grant date of the option), the difference between grant price and market price when you sell the option is taxed as lower long-term gains rather than ordinary income.

HOW SHOULD EMPLOYEE STOCK OPTIONS FIT INTO YOUR FINANCIAL PLAN?

It is important to think of your ESOs in the context of your overall financial plan. First and foremost, your financial plan should be based on clearly defined goals for yourself and your family. Once you have your goals set, how can ESOs best help you reach them? This is never an easy question to answer, but the more you understand about the ESOs at your company and their future growth potential and taxation, the better off you will be.

We’d love the opportunity to develop a custom ESO strategy for you. Click here to schedule a phone call and please visit us at Archer Investment Management.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful executives and business owners, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and an MBA, he is a CERTIFIED FINANCIAL PLANNER™ and a CFA^® charterholder. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.