Greetings all,
I am in the fantastic position of having a hard time figuring out what to do with a series of stock options in my company that are now vested and available for exercise. On the one hand, it really is a lovely problem to have. On the other hand, I don't feel like I have very many choices. I am curious if any of you can identify any strategies that I am missing.
I have about 100,000 options to purchase stock shares for pennies. Those shares are worth about $15 each on the market. I have another 50,000 that will vest over the course of the next few years, at roughly 2,000 per month. I also have restricted stock that will automatically vest every quarter over the same two years and at a similar quantity of about 2,000 per month. I earn about $250k per year of regular salary. I contribute the maximum to 401k and an HSA.
The restricted stock vesting events basically turn into immediate sales, and the income is treated as W2 -- as if I'd earned it in salary form. So it gets taxed fully-loaded at the high marginal federal rates, plus state, plus FICA. Not much I can do about that.
The existing options are just sitting there, and most can be held for another 3 or 4 years before I must exercise. If I exercise and sell immediately, I pay the same fully-loaded tax. If I exercise and defer one year, I pay AMT right away (at what amounts to a fairly similar rate) and then deduct that later when I sell and just pay the long term gains rate. Especially if I think the stock will not lose too much value, many would advocate exercising and holding. However, I ran the numbers, and it's really not that big a difference. At first glance, you'd think it would be the difference between the short-term gains rates (marginal federal) and the long-term gains rates (15%, currently)... but in fact, because of the way the AMT interacts with taxes on the rest of one's income, the real effective rate ends up close to 25% even after the AMT is credited back in a later year. (And, of course, it's no certainty that the LTCG rate will be so low in future years, which could make the savings even smaller.)
If I haven't spouted too much gobbledygook yet, there's more: even if I go ahead and exercise and sell all this stock as soon as I can (one plausible plan...), now I'm left with a whole bunch of cash that I need to manage in a taxable account. I don't think it's possible for my then-meager 401k to counterbalance my portfolio well enough just by putting the tax-inefficient holdings in the 401k and holding equities in the taxable. I mean, I have 220k in my 401k, and we're talking about something like 10x that (post-tax) over a couple of years.
If it helps, I'd like to stop working for pay in roughly 2 to 3 years. We can easily live on 4% or less of that portfolio size. So I will be reducing income considerably, and maybe that opens the door for some other strategies for tax management. (?)
Other than moving to a 0%-tax state, and possibly sending some big donations off to a donor-advised fund like Vanguard Charitable -- effectively bringing forward a bunch of future gifts while they deduct most efficiently against my high tax rate -- is there anything else I should consider in this scenario?
One last question: if the values tripled, so the total set of holdings was worth more like $6M pretax, would that change anything?
Thank you for reading!
I am in the fantastic position of having a hard time figuring out what to do with a series of stock options in my company that are now vested and available for exercise. On the one hand, it really is a lovely problem to have. On the other hand, I don't feel like I have very many choices. I am curious if any of you can identify any strategies that I am missing.
I have about 100,000 options to purchase stock shares for pennies. Those shares are worth about $15 each on the market. I have another 50,000 that will vest over the course of the next few years, at roughly 2,000 per month. I also have restricted stock that will automatically vest every quarter over the same two years and at a similar quantity of about 2,000 per month. I earn about $250k per year of regular salary. I contribute the maximum to 401k and an HSA.
The restricted stock vesting events basically turn into immediate sales, and the income is treated as W2 -- as if I'd earned it in salary form. So it gets taxed fully-loaded at the high marginal federal rates, plus state, plus FICA. Not much I can do about that.
The existing options are just sitting there, and most can be held for another 3 or 4 years before I must exercise. If I exercise and sell immediately, I pay the same fully-loaded tax. If I exercise and defer one year, I pay AMT right away (at what amounts to a fairly similar rate) and then deduct that later when I sell and just pay the long term gains rate. Especially if I think the stock will not lose too much value, many would advocate exercising and holding. However, I ran the numbers, and it's really not that big a difference. At first glance, you'd think it would be the difference between the short-term gains rates (marginal federal) and the long-term gains rates (15%, currently)... but in fact, because of the way the AMT interacts with taxes on the rest of one's income, the real effective rate ends up close to 25% even after the AMT is credited back in a later year. (And, of course, it's no certainty that the LTCG rate will be so low in future years, which could make the savings even smaller.)
If I haven't spouted too much gobbledygook yet, there's more: even if I go ahead and exercise and sell all this stock as soon as I can (one plausible plan...), now I'm left with a whole bunch of cash that I need to manage in a taxable account. I don't think it's possible for my then-meager 401k to counterbalance my portfolio well enough just by putting the tax-inefficient holdings in the 401k and holding equities in the taxable. I mean, I have 220k in my 401k, and we're talking about something like 10x that (post-tax) over a couple of years.
If it helps, I'd like to stop working for pay in roughly 2 to 3 years. We can easily live on 4% or less of that portfolio size. So I will be reducing income considerably, and maybe that opens the door for some other strategies for tax management. (?)
Other than moving to a 0%-tax state, and possibly sending some big donations off to a donor-advised fund like Vanguard Charitable -- effectively bringing forward a bunch of future gifts while they deduct most efficiently against my high tax rate -- is there anything else I should consider in this scenario?
One last question: if the values tripled, so the total set of holdings was worth more like $6M pretax, would that change anything?
Thank you for reading!