Make the most of company incentive stock awards.
Understand your award type: ISOs, NSOs, RSUs, and others.
To maximize your keep, know when and how you are taxed.
Develop a game plan for the stock once it is yours.
Break out the champagne – you’re getting company stock!
While incentive stock plans can provide a great opportunity for wealth accumulation, they also come with a lot of questions and rules to navigate. Incentive stock options (ISOs), non-qualified stock options (NSOs), and Restricted Stock Units (RSUs) are the most common stock awards, and each comes with different planning considerations.
Here is what you need to know to maximize your keep.
What do you have?
Long-term incentive stock plans come in many different forms. As time goes on and more stock is granted, the stock can become a significant part of your compensation and your overall net worth. The most common types of stock awards are:
Incentive Stock Options (ISOs)
Non-Qualified Stock Options (NSOs)
Restricted Stock Units (RSUs)
Be sure to understand your award type, vesting schedules, blackout periods, expiration dates, and more.
How and when are you taxed?
Not all stock awards are taxed the same. To maximize your keep, you need to understand how taxes factor into your awards.
Most stock awards, like RSUs, are taxed as ordinary income and require significant planning to manage the tax liability.
ISOs, on the other hand, offer more control over when taxes are triggered and can provide preferential tax treatment if certain holding periods are met. ISOs are not as common and very valuable because of these special features. When exercised, ISOs are also unique in that they require special alternative minimum tax (AMT) considerations.
Should you keep the stock?
Getting company stock as a form of compensation can be lucrative, but it comes with its own risks. You need to ask yourself - how much is too much?
It can very quickly get to a point where you have too much of your wealth tied to a single company. Taking some of that single stock risk and moving it into a more diversified, age-appropriate portfolio should be a consideration. In the short-term, your employment, paycheck, and benefits are tied to this company; in the long-term, a big part of your financial security is riding on the company’s success, too.
What happens if you leave?
Whether it’s due to a layoff, new opportunity, or retirement, knowing your vesting schedules should be a part of your departure strategy. Most times, your vesting stops when you terminate service. If you leave in July and your awards vest in August, that extra month could have resulted in a nice cushion towards your bottom line.
If your employer gets acquired by another company, then your vesting might be accelerated and can sometimes result in a cash payout of outstanding awards.
Who are your beneficiaries?
As with all of your assets, be sure to name designated beneficiaries wherever you can, so the assets bypass the probate process. Vested shares of company stock are typically held in a brokerage account and subject to one beneficiary designation, while your unvested shares are typically covered by a separate beneficiary designation. If you do not make a beneficiary designation, then these assets will likely be treated as an asset of your estate.
First things first, take the time to get a handle on these fundamentals. If you have questions or need validation in your assessment, then consult with an expert who has experience with navigating the opportunities and pitfalls of company stock programs. Regardless of your level of compensation, it’s crucial to see how these incentive plans fit with the other moving pieces of your financial picture.
Frank Iozzo, CPWA®
President, Private Wealth Advisor