Stock Option Mayhem! | Series 2.8

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Welcome to the Enjoy More 30s: Family Finance

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podcast, the only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out and distract our focus

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from simply enjoying life.

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Welcome once again to the Enjoy More 30s: Family

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Finance podcast. This is the last episode of this series

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before the recap, and this would be the "Your Money Multiplier"

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series. And today's episode is entitled "Stock Option Mayhem!".

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So today, what we're going to cover is what you need to know

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when it comes to making sense of all these different restricted

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stock, stock options, stock purchase plans, and what you can

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do to build them into more of a comprehensive plan or approach,

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that can therefore most benefit you. These are definitely things

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that, you know, stress people out or make people uneasy on how

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they should be approaching it or what the tax ramifications might

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be. And so this is a great, great episode for people that do

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deal with these kind of stock options and associated pieces.

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So my daughter Avery was my first child, she was born back

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in 2016. And I can still remember leaving the hospital,

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they walk you to the door, my wife Lauren's in the wheelchair,

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we're holding this little baby that we're parenting for two

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days. And we know that she's super important. She's really,

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really valuable. And they get you to the door, the sliding

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doors open, the fresh air hits you in the face. And then

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they're like, "Okay, well get out of the wheelchair now. There

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you go, on your way, good luck." And you know, hopefully you know

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enough from that 15 minute class we gave you to keep your

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daughter alive. And you get into the car and you drive home and

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you look in the rearview mirror about 1,000 times and make sure

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she's doing okay back there, and her car seat which is barely,

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barely small enough to fit her.

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And this kind of mentality of being given something that's

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very important, but not quite sure of what we need to be doing

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with it exactly. That relates a lot to how you may be feeling

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when it comes to these, you know, stock options and things

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of that nature, it'd be very much along the same lines. Hey,

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here are these you know, special gifts we're giving to you. They

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sound pretty fancy and important. Here's a 20 page

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document of legalese on how they work, or at least how to cover

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us if you don't use them properly. And you're welcome and

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good luck. Now, the great thing when it comes to stock options,

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as opposed to my daughter, is you can't kill them really. You

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know, this is extra income that's coming to you, or an

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extra potential benefit that's coming to you. So we just want

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to make the best use of this gift that was given to us. And

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so that's what this episode today, we're going to run

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through to try to help.

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We're going to start with what most people get nowadays, which

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are called restricted stock units, or sometimes a lot of

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times are abbreviated as RSUs. They're a little bit more

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straightforward than some of the other things that you may

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already have or may be given. And they attach to kind of a

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brokerage account. So if you have these and you've been given

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maybe a confusing statement on it, you'll see two sections.

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You'll see the first kind of page section that'll have your

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name on it. And a lot of times it'll say TOD, transfer on

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death, kind of account they seem to set up for a lot of people.

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But it's an account that's in your name that has little to

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nothing in it to start. The second, or subsequent pages,

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you'll start to see these restricted stocks broken down.

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And it'll show you what date it was given to you, and then

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they'll talk about when it's vesting. Generally, vesting

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occurs in three years. What vesting means is just now it

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becomes yours. So let's say you got given 100 shares, and it

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vests in three years. Right now there's no value to it, because

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it's not yours yet. They gave you basically a promise to

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transfer this to you in three years, if that's the day that it

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vests. Three years go by, these 100 shares vest, and then what

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happens for most people is all of a sudden now on that first

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page that we started with, where it just has your name on it- a

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general account, all of a sudden you see this 100 shares show up

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in your first account. This is great. Now you see this money is

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here and now you can actually kind of touch it.

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The big thing first off to know when it comes to restricted

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stock is when this vesting occurs, it is now 100% taxable

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in that year. You can't control it, you can't adjust it. If

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those 100 shares the value at that three year part or three

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year day was $10 a share, so 100 times 10, $1,000 is being added

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to your income. That's it, can't change that at all. As the stock

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now changes in value from that point, now that will affect any

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subsequent gains you might have to pay on it, but the bulk of

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what you're going to owe from a tax standpoint is going to be

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ordinary income, just like your wages, in that year that it

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vests. Some people, what they have, we've seen is these

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restricted stocks, they don't even transfer the shares, they

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just immediately sell out of them and send you a check. So

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that might be how yours works as well. The most important part of

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this first part of what we've covered is, if you have

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restricted stock, whenever it vests, it's going to become

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immediately taxable in that year.

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The next part of this, if it does transfer as individual

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stock, this is something that we always caution people about. A

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lot of people have, you know, if you work for your company, if

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you've been there long enough, where you're starting to get

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some of these additional benefits that are being given to

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you, you may have a strong affinity for your company.

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However, being cautious about keeping money in any individual

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stock, your company or otherwise, is something that we

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always caution against because you're putting a lot of your

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eggs in one basket. How your company does or is perceived to

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do now is extremely influential on how much value this has. So

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RSUs are much easier to get out of your company stock right

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away, because again, it's already been taxed. So since

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it's already been taxed, you can take that money out, you could

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put it into a general account, and you can diversify it out

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much more than just one individual company stock is.

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Stock options are way more confusing. So graduating from

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restricted stock to stock options. Less people have these

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now, because the tax rules for what companies were able to do

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changed, so the stock option is less beneficial to the issuing

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company, so that's why you don't see them as much anymore. But

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what makes them more confusing is they don't incur taxation,

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when they vest. So let's say three years is when they vest.

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That's not when the taxation occurs, it occurs when you

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actually exercise the option itself. So instead of having

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this automatic value, there's a price that they're giving it to

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you, and then an end date that you can exercise it. Kind of as

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an example, let's again say you were given 100 shares. Instead

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of just being given 100 shares like for how the restricted

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stock works, they're giving you 100 shares and they're saying

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'we're going to give it to you at a price of let's say $5 a

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share.' Okay, so $5 a share, now goes three years later, now the

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$5 a share went up to $10 a share. So now if you do exercise

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your option, what you're getting is the difference. So they gave

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it to you at five, it's now worth 10, the difference is

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five, so five times 100- now you have $500 of income that's

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realized. But it's not automatic, you have to exercise

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it. On the flip side, let's say they gave it to you at five, and

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after three years it vests and now it's worth $3 per share.

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Your options are worth nothing, because they gave it to you at a

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price of five, right now it's at three when you were able to sell

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it. And so there is no value. You can wait and see if the

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stock price goes up, but there is an end date for stock

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options, so you can't just hold on to it forever.

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Stock options, in my opinion, have the same issue that we

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covered with the restricted stock in that you are having a

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potential large holding in one company. So how that company is

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perceived to do, or how they actually do, influences how the

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stock does and therefore the value of it. So again, we tend

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to like to get out of the stock options more quickly after

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vesting. Sometimes depending on taxation, things of that nature,

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we may want to wait slightly. But the goal still is to not

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have too much money tied up in one individual stock. Stoc

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options, you could go to a whol nother level- there's ISOs a

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d nonqualified, and that'd be a whole thing that's really t

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o much to get into here. But st ck options definitely are a go

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d step up in complexity co pared to their restricted st

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ck kind of counterparts.

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The last major one that I want to cover today are stock

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purchase plans. Stock purchase plans, you might see them as

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ESPPs, these plans are essentially stock discount

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plans. So you can buy into your company's stock at a discount.

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So let's say up to maybe 15%, with a holding period that might

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be one to two years. The discount that you're receiving

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is taxed as ordinary income. Gains above that would be taxed

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at the capital gains rate depending on how long you held

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it. So again, let's say that your current stock, your current

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company stock is worth $10 per share. This means that you would

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be able to buy into it at $8.50 per share. Great, so you

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instantly are kind of in the black- you instantly make money.

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But you need to hold it for say one to two years before you can

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sell it, it depends on the company's plan. You know, that's

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great, I'm basically buying in below current price. But again,

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it's the same kind of thing- you are tied in to how one

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individual stock is doing. So while this can be appropriate

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for some people, that is definitely something that needs

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to be considered, and for some people if they keep doing this

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and they don't sell, they can wind up with a huge

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concentration in one company's individual stock. So using this,

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it can be appropriate for people again. However, in my opinion,

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there should be an exit plan that's part of the strategy.

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So lastly, what you can do. The first thing is make sure that

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you're balancing taxes verse concentration. For stock

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options, for instance, maybe you don't want to realize them right

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now, for example, because next year I'm going to be retired.

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And so if I wait to realize them next year, my tax rate might be

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much, much lower. That could definitely be a strategy.

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However, as a trade off, maybe I have 90% of my money now tied up

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in the stock options in this one company. So even though I may

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take a little bit more of a tax hit, maybe I should sell a

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little bit right now because I don't want to be so concentrated

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in how one company is doing. What you can do is really make

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sure you're paying attention to this balance of being tax

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efficient, versus being overly concentrated, and therefore kind

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of exposed to how one company may be doing or proceed to do.

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The second thing for this for what you can do is plan ahead of

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time. Anything that you're receiving, you know it's going

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to be vesting in x amount of years. Depending on what they

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gave you and everything, you know that at some point it's

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going to be coming to you if you stay there. You can think about

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this ahead of time, just like a bonus, what am I going to do

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with this when it comes. Maybe 50% I'm going to cash out and

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save, 25% I'm going to cash out and use for a vacation, the

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other 25% I'm just gonna kind of hold on to. Whatever the plan

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is, you can do that ahead of time. If you wait until it just

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vests and then it sits there, it's going to feel like free

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money, it's going to feel like it just appeared. And now you're

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not considering taxes, or concentration or any larger

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scale plan. You're just seeing that extra money that maybe you

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feel like you found in your pocket, and you might do

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something with it that you might regret. Or maybe you wouldn't

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necessarily take the steps to do if you had thought about it

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ahead of time.

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So a recap today as this really is the hardest topic that we've

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covered so far to this point. These things definitely are

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confusing to everyone, but there are definitely some simplifiable

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takeaways from this depending on what you may have. The two main

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elements again that it comes down to are dealing with taxes

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and concentration. Taxes should be planned for. RSUs, or

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restricted stock, will automatically be taxed as

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ordinary income upon vesting. Stock options and purchase plans

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you have more control on when it is realized, when those taxes

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are realized. Second element is concentration. The restricted

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stock is easier to emotionally diversify out of because they

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are forcing you to realize the tax upon vesting right away. So

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it's not- the tax element kind of gets taken out, and so it may

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be easier to diversify out of it. The other two though, can be

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tempting to hold on to much longer, but again, always

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remember you are paying tax on some of the gain. You're still

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keeping most of it. Individual companies carry very real risk

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that's tied to, again, how one company does or is perceived to

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do. If the CEO has a personal scandal, that company has its

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stock go down, despite the company itself probably really

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not being any different in a business sense yesterday than it

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is today when it was found out.

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Thanks for tuning in today. As always, if you're able to

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implement what we cover, that's fantastic. This episode is

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definitely the most challenging to do that. But if you can, you

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have less to worry about than before, and obviously you can

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focus more on enjoying life. If you are wanting help with these

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things though, or have questions you need help in clarifying,

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check out the 'Ask Joe' section on the show's website. Again,

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our website is www . enjoy more 30s .com, that's enjoy more

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three zero s .com. If you enjoyed this episode, please

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make sure to follow us and review us on Apple podcasts or

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wherever you listen. There are literally millions of young

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American families out there I'm trying to reach and help just

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like you. This is the final episode. The recap, though, is

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coming next week of this "Your Money Multiplier" series. And

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like the last series, it's a time to take a breather, review

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the last number of topics and hopefully take some level of

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action, whatever it might be, to improve your financial situation

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in a way that removes anxiety to allow you and your family to

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focus more on enjoying life. And we never want to be losing sight

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of the purpose of all these episodes. This series, unlike

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the first one, was much more specific on different financial

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topics and areas you may be dealing with. But the purpose is

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still the same- to gain greater clarity and security about where

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you are going, to have that confidence to go out and live

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life. It's great as always connecting with you today and I

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look forward to doing again so soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS securities Inc, and TFS advisory services an SEC

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registered investment advisor member FINRA/SIPC.