Category: Investment

Three Ways To Maximize The Value Of Your Employee Stock Options

Posted on December 17, 2016 by - Investment

employee stock options (ESOs)

For many companies, offering employee stock options (ESOs) is a way of rewarding employees while also aligning their interests with the company’s success. Stock options were once reserved only for executives but are now offered to many rank-and-file employees. In fact, the number of people holding stock options has increased about ninefold since the late 1980s.

Your employee stock options can be a great benefit—if you know how to maximize their value. Here are three ways to make the most of your ESOs, avoiding excessive taxes and ensuring you don’t leave money on the table:

1. UNDERSTAND THE TAX CONSEQUENCES

Albert Einstein once said, “the hardest thing in the world to understand is the income tax.” Taxes can indeed be complicated, even for geniuses. However, not understanding the tax implications of your employee stock options could cost you a lot of money.

How Stock Options Are Taxed

There are two types of stock options: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). The main differences are who can receive them and their tax treatment. When NSOs are exercised, the difference between the grant price and the fair market value of the stock (the “bargain element”) is taxed at ordinary income tax rates. When the stocks are sold, the gains are taxed as either short-term or long-term capital gains, depending on the holding period.

ISOs receive favorable tax treatment because they meet certain requirements in the Internal Revenue Code. Unlike NSOs, the exercise of an ISO is not a taxable event, though it could trigger the Alternative Minimum Tax. If the shares are immediately sold, the bargain element is taxed as regular income. Holding onto the shares for a longer period can yield a tax break. The bargain element and the gains are taxed at the long-term capital gains rate if you hold the shares for at least a year after exercising and do not sell them for at least two years after the grant date.

Filing An 83(b) Election (4)

If your company’s stock price is growing steadily, it might be a good idea to file an 83(b) election. This election allows you to pay income taxes on the exercise price at the grant date instead of at the exercise date.

For example, let’s say you are granted stock options with a strike price of $25, and the stock price at exercise is $50. With an 83(b) election, you pay income taxes upfront on the $25 cost. Any growth from there is taxed as capital gains when the shares are sold. Without the election, you pay regular income taxes on the $50 price when you exercise the options. The election allows you to pay less in taxes upfront and push the gains into the lower capital gains tax rate.

Filing an 83(b) election can be beneficial if the value of your company’s stock is increasing steadily. However, if the stock price drops or the company goes out of business, you may end up worse off.

Smoothing Taxable Income

It’s important to coordinate your taxable events related to employee stock options. Planning for income taxes generated from exercising options ahead of time can be extremely valuable. Smoothing taxable income over time to stay out of high marginal tax brackets can save you thousands in taxes.

2. GET YOUR DATES ORGANIZED

If you’re like many executives, you may have received various restricted stock options at different times and for different amounts. The restricted stock may have very different vesting schedules than the stock options, and the options may expire unexpectedly. It’s easy to miss a deadline. Many people’s stock options expire because they plan to exercise them at the last minute only to get distracted or simply forget. Not exercising your valuable stock options is like throwing away money.

Being organized is crucial if you want to maximize the value of your employee stock benefits. There are strict deadlines if you want to take advantage of some of the tax savings listed above. Don’t leave money on the table. Staying on top of dates and amounts can save thousands in taxes and help avoid missing out on expired options.

3. DON’T FORGET TO DIVERSIFY

Employee stock options are a nice benefit, but you don’t want too much of your financial well-being tied up in one company’s stock. It’s generally recommended to hold no more than 10% of your portfolio in your company’s stocks and options. Why?

If the company performs poorly, it could depress the stock price, and you might also face job loss. This could impact your portfolio, income, and health insurance all at once. Unfortunately, this has happened to many people. In 1999, when Enron filed for bankruptcy, more than $1 billion in employee retirement savings evaporated. Many Lehman Brothers employees faced similar situations.

HOW CAN WE HELP?

At Archer Investment Management, we understand employee stock options, including ESOs and ISOs. We have experience helping clients minimize related taxes, stay on top of dates and deadlines, and diversify their portfolios. When it comes to your employee stock options, there is a lot at stake if you don’t handle them correctly. Don’t try to do it all alone. Book an appointment with us online so we can discuss how you can get the most out of your stock options.

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.nceo.org/articles/employee-stock-options-factsheet

(2) http://quoteinvestigator.com/2011/03/07/einstein-income-taxes/

(3) http://www.investopedia.com/articles/optioninvestor/07/esoabout.asp

(4) https://www.cooleygo.com/what-is-a-section-83b-election/

(5) https://www.fidelity.com/viewpoints/stock-plan-mistakes

10 Rules to Better Investing: Pursuing a Better Investment Experience

Posted on December 17, 2016 by - Investment

10 rules to better investing

Navigating the financial world can be complex, with an abundance of investment advice, often contradictory. To help you achieve your financial goals, here are ten golden rules that could lead to a better investment experience.

1. MARKET PRICING EXISTS FOR A REASON

The stock market is driven by buyers and sellers setting prices through millions of trades daily. Trust in market pricing, which reflects the collective knowledge and analysis of Wall Street professionals. This approach helps you avoid trying to time the market, which is notoriously difficult and unreliable.

2. DON’T TRY TO BEAT THE MARKET

Long-term investment strategies are crucial. While some mutual funds may outperform the S&P 500 in the short term, this is rare over the long term. Even seasoned analysts can’t predict market movements consistently. Stick to your investment strategy and ignore short-term market noise to avoid potential losses.

3. HISTORY DOESN’T ALWAYS REPEAT ITSELF

On that same token, don’t make your investment decisions only based on past performance. Just because a mutual fund blew everyone away last year doesn’t mean it will thrive this year.

4. LET THE MARKETS WORK FOR YOU

In general, investors who hold tight to a long-term perspective and stay committed to their investment philosophy will more likely see growth in their portfolio. History tells us that the markets have provided enough growth to beat inflation, so sit tight and let the market work for you.

5. KNOW WHAT DRIVES RETURNS

Academic research has identified certain factors that may help you get the best return for your investments:

  • Stocks vs. Bonds: How you allocate your portfolio between stocks and bonds will have the biggest impact on your returns (and risk).
  • Company Size: Stocks of smaller companies (“small-cap stocks”) have historically had higher returns when compared to their larger brethren (“large-cap stocks”).
  • Value Stocks: Stocks can be broadly divided into value stocks or growth stocks. Historically, value stocks have outperformed their more flashy growth-orientated peers.
  • Profitability: Companies with higher profitability tend to have higher returns, over time, compared to lower-profitability companies.

If you focus your portfolio toward these known factors, you may have a higher probability of better returns.

6. BROADEN YOUR INVESTMENTS

Diversification is essential, but don’t limit it to your own country. The U.S. represents only half of the global market capital. By diversifying internationally, you can access a wider array of investment opportunities, which is a key part of smart investment strategies.

7. TIMING THE MARKET WON’T HELP YOU

Like rules #2 and #3, attempting to time the market is a risky endeavor. The stock market is unpredictable, and trying to forecast its movements can lead to unnecessary anxiety and potential losses. Focus on a globally diversified portfolio to benefit from opportunities wherever they arise.

8. MANAGE YOUR EMOTIONS

Emotional investing can lead to poor decisions. Recognize your emotional triggers and maintain discipline. A financial advisor can provide objective investment advice and help you stay on track during market volatility.

9. IGNORE THE MEDIA HYPE

Media often sensationalizes market movements, leading to unnecessary stress. Stick to your investment plan and avoid reacting to headlines. A disciplined approach is key to navigating the stock market successfully.

10. CONTROL WHAT YOU CAN

Since you can’t control the market no matter how hard you try, work on clarifying your goals and needs and work with an advisor to create a plan tailored to your unique situation.

Investing doesn’t have to be complicated, and it doesn’t have to scare you. If you want to pursue a better investment experience, implement these tips into your investment strategy and you may improve your chances of better investment returns and a secure financial future. At Archer Investment Management, we hold true to these ten rules and value disciplined, unemotional, and highly-diversified investing. You will receive objective advice from us as we work together to customize an investment plan for you. If you have any questions about these tips, click here to schedule a phone call. I’d love to hear from you!

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.