As you and your family plan for what’s next – whether that is retirement or something else – be sure to consider how to manage your stock options, deferred compensation and other pay issues in the most tax-efficient way possible.
Ask for an accounting of your total benefits and compensation
You’ll want to know the rules around exercising stock options, vesting schedules and policies about how to draw deferred compensation. Understanding these policies will help you avoid equity concentration down the line as well.
Tip: Pay close attention to the vesting rules. Your window to exercise vested stock options may accelerate upon retirement, and unvested restricted stock and performance shares may be forfeited when you are no longer an employee. If you have unvested awards, consider including them when negotiating your retirement package.
Consider if you can delay lump-sum payments until you’re no longer drawing a salary
When you retire, you’ll likely be at your maximum earnings, and adding lump-sum payments from your nonqualified deferred compensation plan and accumulated stock awards could significantly boost your adjusted gross income as well as your tax obligations. You may be given the choice to take a lump-sum payout in the near term or push payments out five to 10 years, essentially creating a predictable income stream. Your decision is irrevocable, so think through the implications carefully with your accountant and professional advisors.
Concentrate on equity concentration
Executive compensation often includes substantial equity in your company’s stock. Many become attached to it and it’s often hard to imagine a time when the stock may falter. We all know there’s no sure thing in investing, so it makes sense to diversify your holdings to limit overexposure to just one investment.
Work with your accountant to sell your stock over time so you don’t trigger unnecessary tax consequences; violate any insider trading regulations; or infringe on any holding rules established by your company. Then work with your advisor to invest the proceeds in a more diverse range of securities.
Tip: The Securities and Exchange Commission’s Rule 10b5-1 allows you to strategically sell an established number of shares at regular intervals to avoid perceptions of insider trading.
Delay Social Security
Consider delaying Social Security as long as possible so that the payments don’t coincide with years when you have to take large deferred compensation payments.
Keep in mind that these are general guidelines. Consult with your accountant and advisor to determine what works best for you and to get an idea of how proposed tax code changes may affect your options.
Sources: Wall Street Journal; Harvard Law School Forum on Corporate Governance and Financial Regulation
If you have any questions, please give Garry a call at 858-450-9711 or email him at garry@kachkovskyandfisher.com.
Post sponsored by Certified Financial Planner (CFP) Garry Kachkovsky. If you have questions regarding financial planning or investment management, give Garry a call at 858-450-9711 or email at garry@kachkovskyandfisher.com. For more information, visit http://www.kachkovskyandfisher.com/
Kachkovsky & Fisher is a Registered Investment Advisory Firm. This information is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Investors should consider the investment objectives, risks, charges and expenses associated with savings plans before investing.
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