Equity compensation can be a key part of your total financial picture—if you know how to use it. Here are five things to keep in mind as you build this benefit into your overall plan.
Your total compensation package goes beyond your paycheck. And if you receive equity awards from your employer, they can be an important piece of the puzzle, helping to support a range of personal financial goals.
But equity awards can also be complex, so it’s important to understand how they work and how they can be incorporated into your broader financial plan. Here are five steps to consider when determining the best path forward for your equity compensation.
First, review any plan documents provided by your company, as these contain key information about the type(s) of equity awards you have or will be receiving, as well as company-specific details about your equity awards’ vesting schedule and the length of the offering and purchase periods, as applicable.
Additional details to look out for include any blackout periods, when you won’t be able to sell or transfer your company stock, and whether or not the shares pay dividends. Knowing the approximate value of your awards, and how and when those funds will become available, is key to determining how and when you’ll use this money.
Like any investment or source of income, equity compensation impacts your federal income taxes. For example, when your shares vest, or you choose to exercise your options, will this additional income put you in a higher federal income tax bracket? Does the timing of a sale qualify you for the federal income long-term capital gains rate? The answers to these questions largely depend on the type of equity awards you receive, so it is important to understand the federal income tax implications of the type of equity that you are awarded. (For example, incentive stock options, nonqualified stock options, restricted stock and restricted stock units all generally have different federal income tax implications.)
As you’re thinking about federal income taxes, remember to also take into account any previous capital gains or losses from within the calendar year, as well as any capital losses that you may have carried forward from the prior year.
Consult with a tax advisor, who can help you make some careful planning decisions about how to handle your company shares from a tax perspective. While many people save these conversations for year-end or tax season, it’s wise to keep your tax bill in mind throughout the year.
If your portfolio is disproportionately made up of your company’s stock, you may wish to diversify to help mitigate risk. One way to do this is by selling some stock, but remember that doing so may result in capital gains taxes or transaction fees. A tax professional can help you understand the impact of a sale.
Another option is to expand your portfolio by purchasing other kinds of investments, making your company equity a smaller portion of the total. A financial professional can talk to you about structuring your portfolio in a way that balances risk and return potential to align with your objectives.
One of the most rewarding parts of having equity compensation is using it to support your many aspirations. That starts with putting pen to paper about what you’d like to achieve and in what timeframe. Do you need funds for a wedding in two years, your child’s education in 15 years or a comfortable retirement decades from now? Plotting your vesting/exercise schedule and calculating the approximate value of your awards can help you make choices about whether to spend the proceeds on a short-term pursuit or reinvest toward a goal that’s many years away (or perhaps a balance of both).
Equity awards can also be used to support the causes that are close to your heart, as many organizations accept donations in the form of cash or stock. You can choose to gift your company shares, or you may contribute your assets into a Donor Advised Fund (DAF).
Beyond your goals for your own lifetime, equity compensation can be a part of your estate and legacy planning. You may want to think about how this benefit can help the next generation, whether through a direct gift or inheritance, or as the foundation for a trust.
Equity compensation benefits offer a lot of potential, but unlocking that potential takes careful planning. Gather the important details, work through tax questions and list out your goals, and you’ll be well on your way.
If you have questions as you map out a plan for your equity awards, consider enlisting the help of knowledgeable professionals, such as a Financial Advisor and tax advisor.
This material has been prepared for informational purposes only. It is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.
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