On your journey to reach your ideal retirement stock options can be a valuable tool to have in your arsenal.
However, it’s easy to make mistakes with them since it’s not like there’s a class in high school that helps us learn about them.
There are many things to consider with stock options: the different types, timing deadlines, tax consequences, and the leverage involved.
Since it is such a complex topic, many people tend to push the options to the back of their minds and forget to come back around to consider them and they miss out on a valuable opportunity to increase their wealth.
If you have been offered stock options with your company, you’ll want to educate yourself about them to avoid the pitfalls and maximize this valuable benefit.
Join Mike Eklund and me to hear a high-level view of 8 common stock option mistakes to avoid.
What are stock options?
Stock options are a tool that companies use to enhance compensation. They are a great way to align the interests of the employees with the interests of the company.
Essentially, stock options are the right to buy a company’s shares at a fixed price at some point in the future. They have many rules surrounding them, so it is important to stay abreast of what those rules are.
8 common mistakes people make with their stock options
They don’t know the dates. It is important to understand the terms of maturity and the exercise dates. You’ll also need to know how much time you have to exercise your stock options after you leave the company.
They misunderstand the taxes. Stock options are taxed like ordinary income and also are subject to FICA taxes
They forget about them when they get laid off. When you get laid off you’re understandably concerned about other things. However, your options expire typically within 90 days. If you don’t exercise them you’ll lose them, so make sure they become a priority.
They forget to communicate. Your heirs should know about them so that if you pass they can exercise them. This probably isn’t something you typically discuss with your executor, so this is an area where having a good financial planner can help you.
They forget to use the options as leverage. If stock options are a part of your compensation plan they make a powerful negotiation tool when considering other jobs. Don’t be afraid to use them as leverage.
They don’t deal with exercising their options in the best way. A savvy financial planner can help you understand whether you should exercise now or whether you should wait.
They don’t consider the value of their non-exercised options in overall net wealth. When considering your net worth you’ll want to understand the percentage of the company stocks as compared to your overall assets. A good financial plan will help you understand when you need to sell.
They make mistakes in completing their tax returns. This could often lead to double reporting the income. Listen in to hear what you need to know to avoid this.
Press play to hear what else you should consider when you are offered stock options.
Outline of This Episode
[2:20] What are stock options?
[5:00] The difference between NQSO and ISO
[6:41] Common stock option mistakes
[20:10] What you should consider
Resources & People Mentioned
Connect With Chad and Mike
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Chad Smith
Chad Smith is a Certified Financial Planner™. He is an active member of NAPFA, the Financial Planning Association, and FPA’s NexGen. He has been quoted and appeared on WSJ.com, Bloomberg.com, Businessweek.com, Msn.com, Financial Planning Magazine, Triangle Business Journal, and Investment News.
Mike Eklund
Mike Eklund is a CERTIFIED FINANCIAL PLANNER™ practitioner. In addition, he has an MBA in Finance and the Chartered Retirement Planning Counselor designation. He is an active member of NAPFA, is the co-host of Financial Symmetry’s podcast, and has been quoted in various industry publications.