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Don’t Blow This One Chance For Easy Wealth

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Steve Pomeranz, Employee Stock Option Plans

The stock market’s good, the economy’s good, and businesses, on the whole, are doing well. This may mean, for many employees, that the extra compensation they receive through company stock option plans is really beginning to pay off. What I’m saying is that the other income you may receive in the form of stock compensation can be a major boost for your income—but only if you pay close attention and manage it carefully. You see, it’s easy to mismanage employee stock options because there are a number of factors to consider in relation to exercising them. So, today, I want to alert you to five key employee stock option plan mistakes that you’ll want to avoid.

Mistake #1: Failing To Make Your Employee Stock Options Part Of Your Overall Financial Plan

One common mistake that people make with stock option plans is that they don’t pay much attention to them. They tend to treat them like many people treat their 401(k) plan—as something they just put some money into, ignore, and figure they’ll look at in detail later.

It’s important to make this special form of compensation an integral part of your overall financial planning. Hopefully, you’re working with a trusted financial advisor who can help you establish and manage a comprehensive financial plan that covers your income, investments, and retirement planning. If you do, don’t leave your employee stock option plan out of your total financial plan. And a good financial advisor can help you determine how to best use your stock options to help achieve your overall financial goals.

Mistake #2: Not Understanding How Your Options Work

Another common mistake—and one you definitely want to avoid—is not fully understanding exactly how your stock option plan works. Stock options can seem complicated because there are a lot of different variations, so it’s critical to take the time to learn exactly how your plan works. If you’re not sure you completely understand your plan, you can get help from either the human resources department, your financial advisor, or your accountant.

Here are some of the basics most employee stock option plans offer:

  1. Your employer grants you the right to purchase up to a certain number of shares of a company, either at a specific price or at a specified discount from the market price.
  2. There is typically a vesting period before you can exercise your stock options. A vesting period is the periodof time you have to wait until your shares are unconditionally owned by you.

This vesting period is usually just a few years, no more than three to five, and the benefit may be guaranteed or dependent on either you or the company achieving some specified performance goal, like a certain total of sales or revenue.

  1. Also, there is often an expiration date when your stock options expire. If you haven’t exercised your options by then, they’re gone. This is why you want to pay attention. You certainly want to make sure you know that date in order to avoid missing it.

Mistake #3: Allowing Employee Stock Options To Unbalance Your Portfolio

One reason you’re including stock options in your planning calculations is that it’s important to look at their impact on your overall investment portfolio. You don’t want to make the mistake of having too much of your investment dependent on the fortunes of any one company, no matter how great you might think the company is. It’s a good idea to periodically review your stock holdings and think about whether it might be a good idea to sell some of the shares you’ve accumulated in the company to buy shares in other companies in order to maintain a well-diversified stock portfolio.

Mistake #4: Not Considering The Tax Impact Of Your Stock Options

Taxes are another area where stock options can get rather complicated. To avoid making costly mistakes in this area, I definitely recommend working with a tax professional. You may be able to defer paying taxes on shares you buy through your stock option plan until you sell them. You may also qualify to pay the lower capital gains rate on shares you sell rather than your ordinary income tax rate. The bottom line here is to get sound advice from a tax professional before tax time rolls around.

Mistake #5: Not Knowing The Stock Plan Rules For When You Leave The Company

If you leave the company, make sure you don’t leave your stock options behind. Typically, there’s only a short time frame, such as three months, during which you can exercise any remaining stock options you have. Don’t confuse the terms of a severance package with the specific terms that apply to your employee stock options.

If your company is acquired by or merges with another company, that may impact your stock options, too. For example, you might be able to exercise options immediately or your options might be converted to options on the new company’s stock. Check with human resources to find out what the new deal is.

All right, a quick review:

  • Make sure to incorporate your stock option plan into your overall financial planning
  • Know exactly how your employee stock option plan works
  • Handle your shares of company stock to maintain a balanced, well-diversified portfolio
  • Check the impact on your taxes before buying or selling your option stock
  • And make sure you know what happens to your stock options if you leave the company

I hope this helps you get the maximum financial gains from your employee stock options. As long as you manage your buying and selling of company stock wisely, your stock compensation can add up to a significant increase in your wealth and accelerate the success of your financial planning.

Being well-informed is the most important takeaway here. Awareness leads to understanding, and understanding means you make the best choices for your future.

Opinions expressed are those of the author’s and not necessarily United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. There are no investment strategies that guarantee a profit or protect against loss. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however, their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Steve Pomeranz
I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.