Employee Stock Options 5 Top Mistakes that Leave Money on the Table

Employee Stock Options: The Top 5 Mistakes That Leave Money on the Table

Employee stock options can be a wonderful form of compensation. Unfortunately, far too many employees leave money on the table when managing them. Here are the top five mistakes you should strive to avoid:

 

1) Underappreciating Tax Liabilities

There are two types of company stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). They differ in structure, who they’re offered to, and how they’re taxed. Here’s a good review of both.

In order to maximize the value of a stock option grant, employees should always try to minimize the resulting tax liabilities. Stock options can be tricky creatures from this perspective since the option grant, exercise, and resulting stock sale can all be taxed differently. Exercising ISOs can even subject employees to the alternative minimum tax (cue shudder). Thus, tax minimization should be a focal point of any long term stock option strategy.

 

2) Exercising Options and Selling Shares Immediately

Rather than exercising and selling immediately for a profit, it’s almost always better to exercise employee stock options and hold the shares for at least a year. By doing so, the difference between the sale price and strike price is taxed as a long term capital gain instead of ordinary income.

Since long term capital gains are taxed at lower rates than ordinary income, this can be a big tax saving technique. Also, keep in mind that incentive stock options must also be held for two years after the grant date to qualify as long term capital gains.

 

3) Forgetting About Them Until It’s Too Late

The very worst case scenario is when employees forget about stock option grants and allow them to expire unused. While not nearly as costly, another common mistake is neglecting options until they approach expiration. Allowing the exercise window to close limits your options, thwarting the benefits of a thoughtful long term plan.

Employees should start thinking about their stock option strategy immediately after they’re granted. Starting early leaves you the most flexibility, and the best opportunity to minimize taxes and maximize their value.

 

4) Neglecting Stock Plan Rules Before Resigning

Most companies force employees to exercise stock options upon termination of employment. Normally they have 90 days to take action, but the window varies from place to place.

This window for stock options will also be different than the windows for severance packages and other benefits, making things a bit confusing. Before tendering resignation, be sure to understand your company’s stock plan and set a strategy accordingly.

 

5) Failing to Account for a Merger or Acquisition

Mergers and acquisitions affect employee stock options in several different ways. Sometimes vesting schedules accelerate, while in others the existing company’s shares will be phased out and replaced with the new company’s.

When going through a merger, employees should keep abreast of how management is handling their stock plan, and adjust accordingly. If necessary, pester HR for up to date information. The only way to maximize stock option value is to concoct a strategy with up to date data.

The Ultimate Guide to Early Retirement with Rule 72t Distributions

72t Distributions: The Ultimate Guide to Early Retirement

What’s the most common piece of retirement advice you’ve ever heard?

I bet it has something to do with tax advantaged retirement savings.  Most people are inundated with voices telling them to start saving early and take advantage of tax deferrals.  It’s solid advice.  Saving tax deferred money through IRAs, 401(k) plans, and other retirement vehicles is a wonderful way to grow your wealth over time.  The downside?  Those pesky withdrawal penalties.  The IRS will typically ding you 10% if you withdraw from these accounts before turning 59 1/2.  And if you’re considering an early retirement, this can pose a problem.  Fortunately there are loopholes, including taking 72t distributions in substantially equal periodic payments.

 

Tax Advantaged Savings

 

The IRS wants us to save for retirement.  By allowing us to defer taxes in retirement accounts like IRAs, Roth IRAs, and 401(k)s, the government is essentially begging us to improve our own financial futures.

The catch is that we have to keep our money in these accounts until we reach 59 1/2.  Otherwise we’re hit with a 10% penalty, in addition to income tax.

The IRS does provide 9 ways for us to take withdrawals without incurring the penalty:

  • Take withdrawals after 59 1/2
  • Roll withdrawals into another IRA or qualified account within 60 days
  • Use withdrawals to pay qualified higher education expenses
  • Take withdrawals due to disability
  • Take withdrawals due to death
  • Use withdrawals for a qualified first-time home purchase up to a lifetime max of $10,000
  • Use withdrawals to pay medical expenses in excess of 7.5% of adjusted gross income
  • As an unemployed person, take withdrawals for the payment of health insurance premiums
  • Take substantially equal periodic payments pursuant to rule 72t

But it you’re seeking to retire early, you probably don’t want to wait until 59 1/2. And if this is you, most of the loopholes the IRS provides will not apply.

Except for the final loophole, that is.  Rule 72t allows you to take withdrawals from your qualified retirement accounts and IRAs free of penalty, IF you take them in “substantially equal period payments” over your lifetime.  Here’s how:

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The 9 Most Common Small Business 401k Mistakes

The 9 Most Common Small Business 401k Mistakes

It’s no secret that small businesses are often short on resources.  And my guess is that keeping close tabs on your 401k plan is not at the top of your to-do list.

As you likely know, sponsoring a 401k plan comes with certain responsibilities, and neglecting them can get you in hot water with the IRS and Department of Labor.

If you’re wondering whether your bases are covered, here are the 9 most common small business 401k issues I see in my practice:

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6 401k Trends for 2016

6 401k Trends for 2016

Now that we’ve turned over the calendar to 2016, I thought it might be helpful to take a look at current 401(k) and 403(b) trends across the country.  The marketplace is continuously changing, and 401(k) and 403(b) sponsors can maintain competitive and low cost plans by keeping current.

Six 401k Trends for 2016:

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Buying Bonds vs Buying Bond Funds

Buying Bonds vs Buying Bond Funds

Stock markets tend to be pretty good at keeping investors up at night.  Peaks, troughs, business cycles, corrections, and crashes are par for the course when investing in stocks.  And for many investors this is just a little too much excitement.

For anyone uncomfortable with the risk of investing in stocks, bonds are often the first alternative. They won’t nock knock your socks off with huge returns, but bonds can provide steady income with less risk that your portfolio sours.

But when it comes to buying bonds, investors have a big choice to make: do you buy individual bonds or bond funds.

Unlike stocks, the choice between buying individual securities or a fund that includes individual securities has major implications.

Here’s a quick guide that explains what you need to know.

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How to Calculate Solo 401k Contribution Limits

How To Calculate Solo 401k Contribution Limits

Whatever you want to call it: solo 401k, solo-k, uni-k, or one-participant-k,  the retirement plan is one of my very favorite for small business owners.  Solo 401k plans are easy to set up, low cost, and easy to maintain.  But despite the benefits, solo 401k contribution limits and the plan’s other intricacies can be murky.

 

When Can You Contribute To A Solo-401(k)?

 

The solo 401(k) is just what the name implies – a 401(k) plan for business owners without employees.

While most often utilized by sole proprietors and single member LLCs, solo 401(k)s can also be used in partnerships, multi member LLCs, S-corporations, and C-corporations as long as there are no qualifying employees.

Basically, you can make contributions in any year that you report income from self-employment on your tax return.  This can come in several forms:

  • Schedule C income from a sole proprietorship or single member LLC
  • W-2 compensation from an S-Corp or C-Corp
  • K-1 income attributable to self employment earnings, from a partnership or multi member LLC

 

Solo = No Eligible Employees

 

Not only must you have self employment income, but you can’t have any eligible employees.  This is where many business owners get tripped up, because the definition of an eligible employee can seem a bit murky.

Basically, the solo 401(k) is not much different than the traditional 401(k).  Solo 401(k) plans must have a plan document that describes how the plan is to be operated, just like traditional 401(k) plans.  Additionally, all 401(k) plans must be fair & equitable to all participants, and not discriminate in favor of highly compensated employees (or against non-highly compensated employees).

Solo 401(k) plans are no different.  They all have plan documents that must be followed, but since there are no other participants in a solo 401(k), there is no one to discriminate against.

From an administration standpoint this is great for business owners. Making sure that a traditional 401(k) is compliant requires non-discrimination testing each and every year, which can be onerous and expensive.  No employees = no testing required.
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