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Way too much of NW in employer stock
Old 07-23-2021, 04:36 PM   #1
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Way too much of NW in employer stock

This is a "first world problem" for sure. After being with some companies over last 25 years that I exercised now-worthless stock options, my current employer IPO'd during my tenure here and shares are worth 25 to 30x my strike price (plus a bunch of RSU).

While Iove logging into my etrade account to see the balance, the total when i am nearly fully vested next April will be about 40 to 45% of our NW. Frankly, it makes me quite uneasy. I know I need to sell and convert funds to my index funds.

As I understand, the first 80K in LT capital gains are taxed at 0%. So, that is my minimum amount to convert. The rest will be at 20% by my calculations. I think all LTCG will be taxed as ordinary income in CA by FTB.

Any tips or tricks I need to know? I have been buying and holding index funds for a while, zero experience in recognizing any capital gains in my taxable account.

Thanks in advance.
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Old 07-23-2021, 04:52 PM   #2
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Quote:
As I understand, the first 80K in LT capital gains are taxed at 0%.
Nope. If you have $80K or less of taxable income, LTCGs are at 0%. That means if you have $70K of taxable income after deductions, and you convert $80K of that company stock, $10K is at 0% and the rest is at 15% federal. If your income is a lot higher it might all be at 20%. Try running simulations using last year's tax program, or one of the many online tax calculators. https://www.dinkytown.net/java/1040-tax-calculator.html is one I've found pretty accurate.

Are you sure these shares will get treated as LTCGs? When I had options they were NQ, so the difference between option/strike price and current market was all taxed as regular income, on the exercise. I always did a same day stock sale so any small difference there was a ST gain or loss. If they are ISO options you get better treatment. I don't know the details.

All that said, divest yourself of a lot of that employer stock! I got greedy and kept too much of my options, knowing I was moving to a lower tax state the next year. By the time I got there, most of my options were underwater, and I had to keep working more years to recover. If they are really treated at LTCGs, I'd probably sell all you can, even if most is at 20% or 23.8%+state tax. That's a whole lot better than the ~46% I was hitting. Maybe half this year, half next, but if it tanks, you'll regret waiting. It's just too risky to have so much tied up in one stock, even if it's done great for you up to now.

Tips on index funds--before you sell any, set your cost basis to SpecificID, or SpecID. This way you have the most control to sell LT shares that have the highest basis to minimize taxes.
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Old 07-23-2021, 05:13 PM   #3
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Take some time to understand the NUA rules if you have employer stock...not just stock options.

For greatly appreciated stock, you can transfer in kind stock from employer plan to brokerage account and just pay taxes on the stock basis. I lived off the sale of the appreciated stock, and just paid LTCG for a few yeas AFTER I retired and before SSA benefits. If you have other income (salary or SSA or pension) then you may not get the full 0% as stated above.

If the stock is already in an after tax account, the the NUA approach will not be helpful.
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Old 07-24-2021, 12:28 AM   #4
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There’s no real tricks here. The only modest tip I can give is sell in January, and this way you will have the entire fiscal year to benefit from a large market correction once you own the index funds.

The best case scenario is something like this:

1.January - Sell company stock… say its $1m with 800k in gains and marginal rate of 50%, net $600k… maybe you have another 400k in taxable as well for a total of $1m.
2. January - Buy index fund and pay taxes! (Due upon sale)
3. Market tanks horribly. Tax loss harvest your entire taxable account. TLH a $500k loss on your $1m account (depends on cost basis might be 300k or 400k).
4. April of next year, ask Uncle Sam for $150k of your monies back, cashing in your $300k TLH coupon which reduced your 600k gain in #1 to $300k. You now netted a cool 750k of the original $1m.

The reality is you might net nothing if the market keeps going up (if it does, great you won anyhow), or something in between.

In someways, you are in great position with a giant capital gain early in the year. You win if the market goes up…. you win if it tanks (reducing your tax bill).
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Old 07-24-2021, 03:46 AM   #5
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Don't let the tax tail wag the investment dog.

25-30x strike price? All the leverage is out of the option.
RSUs that are vested? Eject eject eject.

I also receive a substantial portion of my comp in equity via options and RSUs. I'm very aggressive about selling RSUs. You pay taxes on them when they vest so out the door they go ASAP in order to diversify.

Options are leveraged on the way up AND the way down. I try to remember that I may not be in charge of when I exit the company...meaning the market could trade lower and I won't be able to wait out the downturn for a recovery to put value back into the options.

I exit options by "pruning the tree from the bottom up". Provided you're receivng the same number of options each year (or more perhaps), if you sell the oldest options (which have less time value remaining and are likely deepest in the money), you get the most off the table for the lowest reduction in exposure to future gains. Our companies stock has advanced fairly consistently. I've often found that if I timed it well, I could take 85% of the vested gain off the table while only losing 15% of future upside.

I also use an accounting trick to nudge me towards action. Vested options don't go on the personal balance sheet until I sell them. I used to include them in my net worth, I found it hard to remember that they were highly leveraged and could be ill timed with my departure from the company. At one point I thought "those will pay for my kids to go to college" and then the value got utterly vaporized in a downturn.

Looking back, if I had just left it all in the options I would have made more. But you can never know in advance if your company will be Apple, Oracle or Enron.

Diversify and move smartly.

My $0.02.
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Old 07-24-2021, 06:37 AM   #6
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We were in a similar situation.

Paid a fee-only advisor for two hours to discuss strategies and understand tax implications of options, RSUs and ESPP shares. We put together a plan to divest a large chuck of the assets and a schedule for the future.

If I remember correctly, the we had a goal to keep 8% of our net worth in company stock. We were young and willing to take the concentration risk in a company we knew well and felt comfortable with its prospects. Once we sold assets to get to 8% of NW and to keep the target, we sold the equivalent of any new vested RSUs/ESPP + returns each quarter. We immediately reinvested the returns based on our target asset allocation. This was similar to what we do now with annual rebalancing, but calculated the trades quarterly. The strategy worked well, especially with ESPP that provided very consistent returns given the company's rules of the program.

We minimized the taxes as much as possible (selling LTCG rather than STCG, donated some shares to charity, etc). We were not interested in some complex tax shelter strategy. The tax bills were still painful, but consider ourselves fortunate to be in the position to have that 'problem'.
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Old 07-24-2021, 06:59 AM   #7
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You may also want to consider gifting your stock in kind to children/grandchildren. The cost basis does not step up, but they may be able to diversify at a lower tax rate (0%??) than you could.
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Old 07-24-2021, 12:37 PM   #8
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We were in a similar position.

Lots know it alls, kool-aid drinkers said the stock was going to $75 plus plus. Others said don't exercise....think of the tax you will have to pay. Tech stock. I was also in the company DB plan. Shades of Enron.

DW said we should sell and protect our retirement. Smart. So we sold half at 52/54.

Started to feel bad when the stock hit 55. Did we screw up? But how can you screw up when you realize a fabulous stock windfall??

Not so much when it went down to 44. Our financial advisor gave me the nod and said we should consider exercising the rest of the options. Lock in, protect the early retirement/travel plans.

We did. At $44/45 The stock was down to our $15 strike price a year later. Got rid of the last few hundred forgotten options when the stock popped up temporarily to 23. Paid for our three month winter trip in one swoop.

I was happy to pay the income tax. Far better than ending up with something else in my hand.

Some colleagues did the same. Others did not. Took the proceeds, put them in the market and have been smiling ever since. Thanks to DW and to our FA.

Greed is not a good thing and I was getting greedy instead of being thankful for what I had. It was clouding my financial decision making. I had started to drink the kool-aid even though I knew better.
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Old 07-24-2021, 02:36 PM   #9
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Quote:
Originally Posted by SeanPizzle View Post
... Frankly, it makes me quite uneasy. I know I need to sell and convert funds to my index funds. ...
That's a wise conclusion, and you are headed in the right direction. Reduce the concentration with an eye to as much tax efficiency as possible. Professiional fiduciaries consider beyond 10% or at most beyond 15% to be an "imprudent conentration" of assets.

However, SGOTI is not familiar with the details of your financial situation, your dependents, your inclinations toward charity, your other assets, or your attitude and plans for your life.

I would suggest that you start consulting your network of friends, professionals like lawyers and insurance agents, and other resources in search of a CPA advisor who is oriented towards individual tax planning and strategies. Find and interview several before making a decision. Then work with your chosen advisor to make and execute a plan.

Specifically avoid "Financial Advisors" who claim to be tax experts. Anyone with fifteen dollars of headroom on a Visa card can have VistaPrint.com make them a financial advisor, wealth advisor, personal tax consultant, or whatever other title they favor. Not that there aren't some good advisors in the pack, but there is no quality control (even the CFP is marginal) and there are crooks out there too. "CPA" is a professional designation that is very hard to fake, so I'd encourage you to go that direction.

From your post, it's not clear how much thought you have put into asset allocation or investment planning. You might benefit from a couple of books:

"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Gu.../dp/0470067365
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Old 07-25-2021, 01:47 PM   #10
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Thank you all for the insightful advice. I will speak with my CPA to make sure I do what I need to in 2021. April 2022 my fire date. I may stay on to transition my business until after the June 30th fiscal year end for most of my customers.
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Old 07-25-2021, 04:03 PM   #11
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DD has been part of an ESPP since 2013. The company is a foreign publicly traded megacorp, with a generous ESPP discount plan (33%)plus Award shares annually based on her annual purchase of ESPP shares. The ESPP shares are vested immediately, but must be held for 5 years before sale, unless qualifying events occur, such as leaving the company, where all shares can be transferred to a brokerage, or sold. The Award shares are issued annually and vest after 3 years, if the stock price appreciates to a certain level, and she is still employed by the company. If the Award shares are in the money, the overall discount grows to 59%, which we have always thought was an impressive benefit. Even the ESPP company match is fully grossed up for federal and state taxes. Fortunately the Award shares have always hit their mark. The stock now represents 8% of her NW.

DH and I have just helped her devise a plan whereby she will sell shares now(at LTCG rates) and decrease her ownership of company stock to 5% of her NW. She will continue to buy the max available at a discount, which also results in the max number of Award shares, AND, sell all available shares each year, to maintain a 5% of NW target, while shifting the sale proceeds to index funds in her AA.
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Old 07-26-2021, 09:34 AM   #12
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We worked with a CPA/tax specialist for a number of years.

That advice and direction paid for itself many times over.

You don't know what you don't know. Especially when it comes to tax and tax sheltering.
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