Category: Investment

How To Reduce Your Tax Bill on Company Stock: One Simple Tip

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.

10 Ways Stock Compensation Can Make You Happier

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

Taxation of Stock Grants: One Tip To Curb Your Tax Bill

Got stock grants?

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:

With Section 83(b) ElectionWithout Section 83(b) Election
Income Taxes Due At Grant$14,400$0
Income Taxes Due Year 3$0$48,000
Capital Gains Taxes Due$19,740$0
Total Taxes Paid$34,140$48,000

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.

10 Simple Tips to Maximize Your Restricted Stock

maximize restricted stock units (RSUs)

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.

What Spredfast Employees Need to Know About Employee Stock Options

As you have heard, Spredfast has announced a merger with Lithium Technologies. (1) When companies undergo a change this significant, there are often ripple effects that impact those who work for the company. In this case, you may have a large sum of Spredfast options coming due this year.  Do you know what to do? What do you need to know about your employee stock options?

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 those 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!

But what 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: Non-qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). NSOs are the most common type offered by employers.

Non-qualified stock options 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 NSOs are exercised, income, Social Security, and Medicare taxes will be withheld.

In contrast, incentive stock options 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 NSOs 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 NSOs, 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 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 NSOs.

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 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.

As you make your decision on whether or not to accept Spredfast’s offer of an ESO buyout, it’s critical to take all aspects of taxation, income, and your financial plan into consideration. At Archer Investment Management, we specialize in helping corporate executives make the most of their complex benefits. We’d love to help you with this important decision. Download our StockOpter® Stock Compensation Summary Analysis report, check out our case studies to see how we’ve helped clients like you, and 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 to executives in technology firms. 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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What You Need to Know About Employee Stock Options

Employee Stock Options

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

How To Have A Sustainable Home In Austin For Under $100

For most of us, one of our biggest investments is our home. As such, we often want to improve it, making it the best it can be with the hope of seeing a significant return when we sell. 

One of the big buzzwords in the homeownership world right now is sustainability. People are becoming more aware of how their lifestyles affect the environment and want to do their part to address climate change. One way to do this is to power your home with 100% renewable energy. But how can you do this without breaking the bank? Is it a worthwhile investment? 

WHAT IS RENEWABLE ENERGY?

First, a definition is in order. Simply put, renewable energy is electricity generated from renewable sources such as wind, sunlight, biogas, and tidal energy. Energy from these sources is limitless and clean and it does not add pollution to the atmosphere. Non-renewable energy sources like coal and natural gas have environmental costs, such as emissions into our air and water.

Is It Worth The Cost?

One question many people have is whether or not switching to renewable energy will save them money down the road. I recently had a financial planning client asking about this exact topic. They wanted to do their part to address climate change by powering their home with 100% renewable energy and asked if they could afford a large solar array on the roof of their home.

The problem was that a solar array big enough to completely power their home was going to cost almost $20,000. When we crunched the numbers, we realized it might take about ten years for them to recoup the upfront costs. Instead of the high initial investment of a solar array, I suggested another solution that would upgrade their home to 100% renewable energy sources for less than $100 extra per year. At that price, my client was intrigued. Are you?

The Power of Wind

Currently, fossil fuels make up 81.5% of U.S. energy production and about 40% of total US energy consumption is from the residential and commercial sectors. (1)  However, renewable energy production was at record highs in 2016. From a local perspective, Austin Energy generates about 30% of its energy from wind, solar, and biomass. (2)

Wind power is a net zero energy source, meaning it has zero fuel cost, produces zero emissions, and requires zero water use for production. If you live in Austin, you have the opportunity to take advantage of the GreenChoice program, which allows you to support renewable energy by ensuring Austin Energy purchases Texas wind energy to match 100% of your usage instead of energy produced with fossil fuels. (3) When you subscribe to GreenChoice, you make a lasting contribution to Austin’s quality of life and take a leadership role in moving Austin toward its community goal of 55% renewable energy by 2025 and 100% by 2050.

Subscribing to GreenChoice means that Austin Energy can purchase wind energy to meet your needs instead of electricity produced from natural gas or coal-fired power plants. Relying less on fossil fuel combustion for energy means less air pollution and less water wasted in drought-prone Texas. Your purchase of GreenChoice energy supports the growth of the renewable energy industry in Texas, which creates new jobs in the state and produces new revenues for school districts.

In 2016,  Austin Energy GreenChoice customers invested in more than 719 million kWh of renewable energy. This translates into reduced carbon emissions equivalent to the impact of more than 11 million trees. If that isn’t enough to entice you to make this change, the average Austin residential customer can switch to wind energy for about an additional $6.70 per month with no contract, no subscription fees, and no penalty for unsubscribing.  Additionally, new and existing Archer Investment Management clients who switch to Austin’s GreenChoice program before the end of 2017 will receive a one-time $100 discount off our fees.

IS RENEWABLE ENERGY RIGHT FOR YOU?

As with any financial decision you make, it’s important to do your research and talk to experts in order to make an educated decision. At Archer Investment Management, we ascribe to a disciplined, unemotional, and highly diversified investment approach, favoring objective and time-tested advice to “trendy” stocks. If you want to invest into companies that further the social missions that you value, reach out to us for a complimentary portfolio review. Click here to schedule a phone call.

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 individuals and couples, 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 a 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) https://www.eia.gov/tools/faqs/faq.php?id=86&t=1

(2) http://austinenergy.com

(3) http://austinenergy.com/wps/portal/ae/green-power/greenchoice/greenchoice-renewable-energy

Socially Responsible Investing: Doing Well While Doing Good

Have you ever considered the impact your investments make? Have you looked at the companies in which you’re investing and considered how they contribute to global problems or solutions? If you’ve wanted your investments to align with your values, you’re not alone. You just might not realize there’s a way to do so.

THE GROWTH OF SOCIALLY RESPONSIBLE INVESTING

Socially responsible investing (also known as sustainable, ethical, or conscious investing) is an investment strategy that aims to consider both financial return and social good to inspire social change. Think of it as an opportunity for doing well while doing good. Socially responsible investing, or SRI, has increased in popularity over the years, growing 76% between 2012 and 2014 from $3.74 trillion to $6.57 trillion assets, according to Envestnet PMC. 

Particularly since the Trump presidency and a slew of government policy changes, demand for SRI has continued to steadily increase. Additionally, Millennials have shown significant interest in SRI, which has contributed to the growth. Investors want to be able to invest in companies that support issues they care about, whether that’s social programs, education, or the environment. Individuals investors can essentially target their concerns through their investment behavior and consumption decisions.

DOES SOCIALLY RESPONSIBLE INVESTING MAKE SENSE FOR YOU?

Investing in companies that support causes you care about while also generating returns is appealing to many investors, which is likely why SRI has steadily increased. However, opinions are still mixed about the impact of SRI strategies on performance. Some studies claim that socially responsible investments don’t perform as well as traditional stock market funds. Additionally, some of these investments come with higher annual fees. And, depending on the type of company in which you wish to invest, such as wind, solar, or other alternative energy funds, you may face more volatility.

Morningstar reports that the average U.S. SRI mutual fund trails the benchmark S&P 500 index, but many funds that don’t fall into the SRI category have also fallen behind the market. As you can see, the jury is still out on whether or not sustainable portfolios experience a performance penalty.

Generally speaking, professionals recommend identifying reasons to invest in a stock, rather than focus on avoiding ones you don’t align with. Instead of focusing on stocks you don’t want to invest in, research those that you want to support. 

FINDING BALANCE

Like any financial strategy, balance is key. Depending on your specific goals, you can incorporate SRIs into your portfolio. This gives you the opportunity to generate returns and save for your future while also supporting companies with social missions that align with your values.

The first place to start is to speak with a financial advisor and discuss your investment goals, your social values, and how they can integrate. At Archer Investment Management, our investment approach is disciplined, unemotional, and highly diversified and we favor objective advice to “hot stocks” of the moment. The philosophy we follow is based on the science of investing that drowns out the noise of the media and focuses on time-tested and thoroughly-researched strategies that have been proven to drive returns, reduce volatility, and simplify the investment process. 

Providing comprehensive investment guidance, we can help you evaluate your SRI opportunities. For a complimentary portfolio review, contact our office at 800-840-5946 or click here to schedule a phone call.

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 individuals and couples, 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 a 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

Investment Shock Absorbers

stock-market-tracker

Have you ever ridden a touring bicycle down a mountain? I wouldn’t recommend it. Touring bikes are designed for paved roads, so shock absorbers are eliminated to make them lighter and pedal more efficiently.

If you took a touring bike down a mountain, you would end up in a lot of pain. For something like that, you need a mountain bike. They are designed with shock absorbers to cushion the impact of the rocks, logs, ditches and other obstacles you will inevitably confront on the trails.

CAUSES OF A BUMPY INVESTMENT RIDE

Sometimes investors feel like they are riding a touring bike down a rough mountain. Every bump in the markets makes them want to cry out in pain, and they wonder if they’ll ever make it to their final destination. Why is this?

One thing that can make for a really jarring ride is having an undiversified portfolio. If your investments are highly concentrated, every little dip in the markets will be magnified and leave you reeling.

Another thing that will make for a really choppy ride is constantly changing asset allocations based on short-term rough patches in the markets. If you let every market pothole throw you off your bike, you’ll never get anywhere.

HOW TO SMOOTH YOUR INVESTMENT RIDE

So, how can you smooth out your ride? What shock absorbers can you add to your bike to get you down the investment mountain in one piece and enjoy the ride?

Diversification. Spreading your portfolio across different securities, sectors, and countries will even things out and make for a much more comfortable, safe, and enjoyable ride. You will need to identify the right mix of investments, like stocks, bonds, or real estate, that align with your risk tolerance. This will keep you on track toward your goals no matter the obstacles that crop up.

You may not end up with the top performing portfolio, but you definitely won’t have the worst either. This strategy isn’t about being the best, it’s about creating a smooth enough ride for you to hang on until you get to the bottom of the hill. Without these shock absorbers, you are likely to quit halfway down.

IT’S IMPOSSIBLE TO SWERVE AROUND EVERY BUMP

Just as you would try to swerve around everything possible if you were riding a touring bike down a mountain, people with concentrated portfolios resort to market timing and constant trading in an attempt to anticipate the top-performing countries, asset classes, and securities.

This is nearly impossible. Here’s an example of just how unpredictable the ride can be. Among developed markets, Denmark was number one in US dollar terms in 2015 with a return of more than 23%. But if you had bet big on that country the following year, you would have ended up in a ditch. In 2016, Denmark slid to the bottom of the table with a loss of nearly 16%.

Even the US stock market, which is the world’s biggest, can throw you for a loop. It has been a strong performer in recent years, holding the number three position among developed markets in 2011 and 2013, first in 2014, and sixth in 2016. But a decade ago, in 2004 and 2006, it was the second worst-performing developed market in the world.

Trying to predict which part of a market will do best over a given period is also challenging. For example, while there is a plethora of evidence to support why we should expect positive premiums from small cap, low relative price, and high profitability stocks, these premiums are not laid out evenly or predictably across the map. US small cap stocks were among the top performers in 2016 with a return of more than 21%. A year before, their results looked relatively disappointing with a loss of more than 4%. International small cap stocks had their turn in the sun in 2015, topping the performance tables with a return of just below 6%. But the year before that, they were the second worst with a loss of 5%.

If you’ve ever ridden down a mountain, you know to expect the unexpected. There may be a rut or rock pile hiding just around the next turn. It’s important to have a bike with proper shock absorbers to handle whatever may come. Diversification isn’t some kind of magic that will make everything a perfectly smooth ride. But, it does smooth things out so that no individual investment will throw you off your bike. There will still be bumps along the way, but nothing that will keep you from reaching your goals.

DOES YOUR INVESTMENT BIKE NEED A TUNE UP?

Take a look at your portfolio. Does your investment bike need some shock absorbers? You’ve come to the right place because I’m an investment mechanic! With sufficient diversification, the jarring effects of performance extremes level out. Then, you will be able to hang on and enjoy the ride all the way to your investment destination. Click here to schedule a phone call, and we can get your portfolio ready for whatever lies around the next turn in the trail.

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 individuals and couples, 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 a 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.

Moving Towards a More Global Investment Strategy

papers

Twingo. Clio. Polo. Ibiza. Do you know what these are? Maybe Caribbean islands?  Possibly the names of Angelina Jolie’s children? Surprisingly, these are the most popular cars on the Spanish island of Tenerife, 90 miles north of Morocco. I only know this because I tallied them as they passed me on my four-hour bicycle ascent up the famous mountain El Teide.

I consider myself a “car guy,” yet I had never heard of these cars. I find that the more I travel, the more my eyes are opened to the fact that there are people living very different lives from mine who have valuable perspectives. This simple car analogy reminds me that I need to travel more and expand my viewpoints and knowledge beyond my everyday life in Austin, Texas.  

CHALLENGING OUR PRECONCEIVED IDEAS

It’s easy to think I’ve got everything figured out. I know where I want to live, what I like to eat, and the best places to ride. But that’s not the reality. Those things may be comfortable and familiar, but I keep finding new favorite things in new places. For example, Gran Canaria has the most difficult climbing in the world (not Boulder, CO), and I might like speaking Spanish more than English because it flows better!

This past election brought up plenty of talk about our personal “bubbles,” but many of us don’t take the time and effort to recognize our own bubbles that we base everything else on. It takes habit and discipline to look at things from a different perspective and learn other ways to do things.

For example, at one of my nightly team dinners, I sat near a Brazilian couple and listened attentively as they took me for a personal tour of South America. As I heard their thoughts, my limited life bubble seemed in stark contrast to their worldliness, and my preconceived notions were challenged. In their minds, Brazil is the “America” of South America, big and diverse with the best beaches in the northern part of the country (please don’t let this secret out!). Argentina is like France, where residents feel culturally elite and more refined than their South American neighbors; and Chile is most like Canada, friendly and inviting. Now that I know more about South America from their point of view, it feels less daunting for me to travel there, and Chile may show up on a future itinerary of mine.

It was fascinating to hear them thoroughly discuss a topic I had never taken the time to consider. I quickly learned that my worldview is greatly limited by my lack of experience. Just like most of us, I tend to favor the familiar and fear the foreign because I don’t know any differently. America is the best at everything after all, right?  This concept goes beyond travel, it relates to your portfolio as well.

THINK OUTSIDE OF THE INVESTMENT BOX

When I was a young investor, my portfolio leaned heavily towards familiar U.S.-based investments. In my mind, they were certainly less risky than unfamiliar foreign holdings. But I soon learned that there is a world of opportunity in equities. Did you know that the weight of the U.S. stock market relative to the global market is approximately 54%? As shown below, nearly half of the world’s investment opportunities are outside of the U.S., with non-U.S. stocks representing more than 10,000 companies in over 40 countries.

Although U.S. stocks have been in favor the last few years, this has not always been the case. January 2000 – December 2009 is known as the “Lost Decade” because U.S.-only investors lost money cumulatively over those 10 years. Here’s a look at how the market played out during that period:

Exhibit 2: Global Index Returns January 2000–December 2009

Diversification is Key

Over the last 20 calendar years, the U.S. has been the best performing country twice, and the worst performing country once. Global diversification implies that an investor’s portfolio is unlikely to be the best or worst performing, instead providing the means to achieve a more consistent outcome. It helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.  

It’s important for us to expand ourselves with new experiences and knowledge as well as seek diversification in our portfolios. Not only does it improve our quality of life, but it also makes us more understanding of others and lessens extremes. If you are curious about global markets or worried that your portfolio isn’t globally diversified enough, I’d love to talk to you. Click here to schedule a phone call. To close, te veré en Santiago (I’ll see you in Santiago)!

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 individuals and couples, 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 a 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.