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My stock options have vested. Do you think I should exercise them, and then hold for long term capital gains?

May 21, 2013 by J from Thousand Oaks, CA in  |  Flag
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When you exerices your options you are taxed on the difference between your exercise price and the market price. Therefore you have money at risk. If you hold for long term capital gains there is a risk that the stock will go down--why take the risk? You are better off exercising and selling to avoid that risk. The only advantage of stock options is their leverage and after you exercise there is no leverage.

1 Comment   |  Flag   |  May 22, 2013 from Calabasas Highlands, CA
Rich Winer

I'm wondering why you feel holding the stock would be any more risky, less beneficial than other investments he/she might hold in his/her portfolio. As long as the company stock position is not out of proportion with other investments and appropriate for risk tolerance, time horizon and other factors, and as long as the owner has a good handle on the company's operations and prospects for growth, why not hold the stock (or at least a portion)? I know people who have made a lot of money in their company stock, which they know and follow better than most.

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Flag |  May 23, 2013 near Woodland Hills, CA

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Rich Winer Level 20

Yes, if you are knowledgeable about your company and the prospects for future appreciation. If you're not sure, you might want to consult with a financial advisor.

2 Comments   |  Flag   |  May 21, 2013 from Woodland Hills, CA
Rich Winer

After reading Lee's response, I'm not sure if I'm fully understanding your question or Lee's response. So maybe I will learn something here as well, maybe not. In answering your question, I assumed you were asking whether or not it would be advantageous to exercise your options and own your company's stock. Am I correct? The answer, in my opinion, would depend on the issues I mentioned above. If you exercise your options and own company stock inside your company's retirement plan, then employing an NUA strategy would be a consideration when you retire or change jobs and are considering rolling the assets inside your company retirement plan to an IRA or another company retirement plan. Employing an NUA strategy could save you a lot of money in taxes. However, if your stock options are exercised and owned outside of your company retirement plan, I'm not sure where or why NUA would enter into the picture. Perhaps Lee can explain. I am quite familiar with NUA and have implemented NUA strategies with a few clients, but always in regard to company stock held inside the client's company retirement plan.

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Flag |  May 21, 2013 near Woodland Hills, CA
Lee Munson

Rich - you bring up good points here. Without more information we don't no much about the situation. Both of us bring up some good points. My take is simple - the exposure to your own company's risk can be transferred to different places. For instance, exercising stock options in a taxable environment - cashing out, and gaining exposure in your 401k. Yes, it can be confusing, but a well thought out strategy covers a few main items. First, do you want the exposure and how much? Second, what is the most efficient way to own that exposure? Third, how can you reduce your tax liability? Buy looking at general strategies like NUA, exercising options and holding the stock, or anything else under the sun - you can put together a cohesive plan. My thought is to cover a few general ideas so investors get the picture this is not a black or white issue.

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Flag |  May 21, 2013 near Albuquerque, NM

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Lee Munson Level 16

Whoa . .. Has your advisor talked to you about NUA? If not, fire them. Net unrealized appreciation is a tax strategy. In English, you may be able to take your company stock out of a 401k (or move your allocation to company stock from a deferred compensation account and repurchase in your 401k), pay tax on your basis, then qualify for capital gains on the appreciation. Many CPAs don't understand this, but hey - most advisors are salespeople that wouldn't know livestock from preferred stock. You know your company, and with a strong financial plan you can make a business decision on how much risk you want to take. We are working with a client near retirement now. We found how he could decrease his potential tax liability by using a NUA strategy. What is the catch? The stock has to go up, not down. That's the trick, isn't it? It is also inside a 401k - and you may not. The main thing an advisor that knows what they are doing will want to know is - do you pay the tax on the options or does your company? Good luck! Drop us a line if you want to talk.

Comment   |  Flag   |  May 21, 2013 from Albuquerque, NM

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J, there are a gazillion answers to that. My colleagues have touched on some. Mostly, it depends on your goals or purpose for the money. If you don't have a specific purpose for the stock, you may want to leave it alone. If you are leaving the company, you will want to be sure to take your equity with you, though. However, if you are concerned about tax consequences, maybe your 'exercise and hold' plan will work. There are too many variables to consider here, so you best bet is to find a financial planner (not a salesperson) and spend some time discussing your situation. Good luck!

Comment   |  Flag   |  May 21, 2013 from River Hills, SC

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These stock options may be inside a qualified plan or outside a qualified plan. As you can see from the responses, this could be a hand grenade or a cornucopia. We would all need a discussion and have a plethora of questions for you before really know which path to recommend. It is very important that you find someone who is competent to help you sort it all out. Most of the choices that you could make have irreversible consequences and could be very costly to you. Go forth and conquer.

Comment   |  Flag   |  May 23, 2013 from Franklin, TN

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