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Stock-Based Compensation: Timing, Taxes, and Diversification in a Changing Market
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Stock-based compensation can be a valuable asset for executives and professionals seeking to build wealth. However, it can be complex to manage, especially when markets are chaotic.
You know better than anyone: when your compensation is tied to your employer’s stock, the value of your portfolio can change very quickly. That’s when planning comes in, and it includes more than just your paycheck. It also covers how and when you turn that equity into actual wealth. When done right, you’ll stress less and have a better chance of reaching your big picture goals.
Starting With a Clear Picture
First things first: What do you currently own? What are you expecting to receive? What’s vested, and what’s not? Understanding your equity means considering your holdings, your vesting schedules, and any options you plan to exercise. Then, you can start planning around timing and cash flow. This sequence is something we like to emphasize when helping our clients create a customized wealth plan.
Each type of stock-based compensation has its own specific tax implications. For example, Restricted Stock Units (RSUs) are usually taxed as ordinary income when they vest, while Incentive Stock Options (ISOs) can have Alternative Minimum Tax (AMT) considerations. Knowing these key concepts will avoid unintended tax consequences. Now, this doesn’t mean you will always find the “perfect” time to sell, but you can be more “tax-aware”.
Believe it or not, there are cases when a down market can be an advantage. A clear example is selling investments that have decreased in value to realize a loss, which can be used to reduce ordinary income tax liability (up to a certain limit). However, it doesn’t always apply, which is why having the right financial advice is important. Movements like these require coordination that goes beyond your current portfolio.
Emotions Can Undermine a Solid Strategy
If your company’s stock price drops, especially if it represents a large amount of your net worth, your emotions might trick you into wanting to sell. This is a normal, human response. But recognize this as your sign to pause and ask yourself: “Do I need this money now? Am I low on cash flow?”
If the answer is no, it probably makes more sense to wait or even reinvest the proceeds of a sale into a diversified portfolio, rather than thinking of it as “locking in a loss”. In the long term, it might not even be a loss, but this approach requires long-term thinking from the outset.
Understanding your own emotions is important. It can be the difference between a solid strategy that puts your equity to work toward your bigger financial goals, versus impulsive responses that work against you.
Diversification Isn’t Just a Buzzword
Here is a simple but uncomfortable truth: concentrated stock positions create risk. Even if you are confident your company’s stock is going to rise, the financial reality is that too much exposure to one asset puts your wealth at higher risk in comparison to a diversified portfolio. (You know what they say: All the eggs. One basket.) It may be better to gradually sell vested shares and reinvest them into a broader portfolio. This can reduce risk and provide more long-term stability.
Also, diversification isn’t just about reducing risk; it’s about increasing your flexibility. With a diversified portfolio, you’re more likely to navigate the market shifts and feel more confident in your financial position and the goals behind it.
Planning with Intention
At the end of the day, equity compensation is less about being another investment and more about you. Your long-term goals. Your values. Your timeline. That’s stock compensation and any actions taken must align with your bigger picture goals and priorities. At Monument, we start by asking, “Whats the Money For?” This way, when you reach the moment of decision: whether to sell, hold, or reinvest your company stock, we can advise you confidently, providing straightforward options that dismantle confusion, provide clarity, and help you move forward with intention.
Want to learn more? Check out our latest podcast episode to learn more about how to adjust your stock compensation strategy in a down market.
Don’t miss our podcast on Stock Compensation Strategies
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