By Reagan A. Hamilton, ChFC® - Financial Consultant
Earning equity based compensation can be very financially rewarding but can also lead to taking on considerable risk. When a portion of your compensation is in the form of shares of stock, especially with a vesting schedule or a restriction on when you can sell, it often leads to a large percentage of net worth being dependent on the performance of one company’s stock price. For this reason, careful investment planning is necessary for anyone receiving equity compensation. Conversely, with careful investment and tax planning, equity compensation can be a considerable contribution to wealth building and retirement planning.
Equity based compensation comes in several different forms:
- Stock Options
- Non-Qualified Stock Options
- Incentive Stock Options
- Restricted Stock Units
- Performance Shares
All of which have different tax, liquidation, and vesting characteristics. If more than 10% of your investable assets are tied to the performance of one company, especially in a volatile market, you may want to offset that risk by reallocating other portfolios to reduce exposure in similar asset classes or equity sectors.
This becomes even more difficult when considering the tax implications of liquidating your company stock.
Working with a qualified Financial Professional who specializes in equity based compensation can help you with:
- Allocating your household portfolio around your equity compensation
- Timing of when to sell or exercise your shares in a tax efficient manner
- Tax loss harvesting with other after-tax portfolios around the sale of your equity compensation
If you need help putting together your equity compensation package so that it works with your long-term financial plan, please don’t hesitate to reach out to us!