Advisors Reveal Top Tips For Stock Options, RSUs, ESPPs
10 September 2024
Equity awards are complex, and so is the financial planning. No single strategy fits all. You must link the necessary financial and tax decisions to your own personal situation and goals. However, there are some general financial-planning considerations to understand before you start. A recent myStockOptions webinar featured four leading advisors who routinely work with clients that have equity comp and company stock acquired from their grants. In the real-world case studies they presented, they discussed their core strategies for stock options, RSUs, ESPPs, and company shares.
Start With Your Personal Goals
All of the advisors who spoke in the webinar cited the complexity and highly personal nature of planning for equity compensation and company stock holdings. “I always start with clients by asserting that these are complex benefits,” said panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and the author of a highly anticipated forthcoming book, All The Presidents’ Money. Megan emphasizes the importance of “playing the long game” with her clients. “We have to keep them on strategy, and strategies are personal—ignore the watercooler talk.”
“I also start with the client’s personal and financial goals,” stated panelist Chloé Moore, the founder of her firm Financial Staples in Atlanta. “What are they wanting to accomplish in the short term and in the long term? What are their cash needs? What do they want their life to look like and how can we use these RSUs or other equity awards as a tool to help make those dreams reality?”
Equity Comp As Goal Accelerator
Chloé said she often frames this as “accelerating that timeline.” For retirement goals, the stock-sale proceeds can perhaps go toward saving more, investing more, and making retirement possible sooner. For short-term goals such as buying a house or paying off student loans, the proceeds from equity awards can bring those goals even closer to the present.
An important point that Chloé stressed is that you should “live off your base salary and not rely on occasional income from equity awards or bonuses to fund basic living expenses.” Stock compensation “is really something that clients need to achieve or accelerate financial goals,” she reiterated.
Be Realistic With Yourself
Danika Waddell, the founder of Xena Financial Planning in Seattle, raised the importance of personal comfort level and pragmatism in financial planning for equity comp and company shares. “I think it’s really important to keep in mind that even though there may be an optimal financial or tax strategy, it may not make sense for the client—whether they’re not comfortable with it or it’s too complicated or for whatever reason they are just not willing to do that strategy. You have to find something that’s going to work for that client.”
She pointed out that, oddly enough, the strategies which actually work for her clients are often not the ones that are optimal from a tax perspective or a financial perspective. They are successful, she emphasized, because the client will stick to them.
“Tune out the noise,” added Danika. It’s vital, she asserted, to craft and stick with a financial plan that is tailored for you, regardless of casual advice from those around you. “Almost all of my clients hear a lot of opinions from co-workers and on Slack channels. They may also be getting input from an uncle, a dad, a cousin. What I say to clients is that they may be smart people and know a lot about tax situations, they don’t know everything about your situation. They may be at a different life stage. They may be in a different tax bracket.”
Know How Much Tax Will Be Withheld
For most employees, 22% is the statutory federal withholding rate for supplemental wage income, such as income recognized from stock option exercises or RSU vesting, and it’s the rate that most companies use. (The required withholding rate rises to 37% for amounts in excess of $1 million during the calendar year.) Depending on your overall yearly income and tax bracket, the 22% withholding rate may not be enough to cover the taxes you actually owe according to your bracket rate.
“A lot of my clients’ companies now give employees the chance to add extra withholding on top of the 22%, so they can choose exactly the amount of withholding they want,” observed Chloé Moore. “If that’s a choice and it makes sense for the client, we’ll get that as well. If not, we’ll want to be sure they set aside cash to cover the tax bill.”
Quarterly estimated tax payments are one way to cover any shortfall in the tax withholding. Alternatively, you can put cash aside from stock-sale proceeds to pay the taxes with your tax return for the year.
Sell The Company Shares Or Hold Them?
This is the $100,000 question (or maybe even more). When you receive shares of your company’s stock via equity compensation, whether you sell or hold the shares depends on various factors. Some of those factors, especially personal ones, are under your control, while others stem from the tax rules, your company’s stock plan, or its blackout periods for insider-trading prevention. Nevertheless, many advisors often suggest immediately selling all or most of the shares received at RSU vesting, chiefly to diversify and thus avoid the risky overconcentration of your wealth in just the stock of your company.
Webinar panelist Daniel Zajac, the managing partner of Zajac Group in the Philadelphia area, often takes this approach. “Generally speaking, selling RSU shares right when they vest is where we lean with most of our clients, and then we figure out what to do with the proceeds,” he explained. “Are we going to cover taxes by putting money on the side, making estimated tax payments, running tax projections? Or are we going to take the rest of it and invest it, fund a goal, buy a house, doing whatever the client wants to do with that excess money.”
Diversification
Danika Waddell concurred—and pointed out the importance of diversifying. “This isn’t a blanket rule, but for many of my clients I recommend selling RSU shares soon as they vest and setting aside money for the taxes and just diversifying,” she said. “Many of the clients I work with come to me with already 60%, 70%, 80% of their net worth tied up in their company stock, so we’re absolutely working on diversification. If that’s not the case, it’s a little less critical. But for many people it’s just sell as soon as the shares vest.”
Danika recommends this course of action even more strongly for shares acquired via an employee stock purchase plan (ESPP). “If someone is going to participate in an ESPP, I always recommend selling the ESPP shares as soon as they become available. I don’t really want anybody to hold on to them. I’ve seen too many situations where it doesn’t pan out, and then the ESPP taxes are just so complex on top of that.”
Automate Selling Under Your Plan Where Possible
Automated selling is another recommendation that Danika favors. “I’m a big fan of automation. If your company allows you to set things to auto-sell, that leaves one less thing on your plate. Especially if your RSUs are vesting monthly, you otherwise have to go in and remember to sell shares.”
Daniel Zajac agreed. “As much as we can automate selling for clients, we’re all for it. It’s not uncommon for our clients to come in regularly with $50,000 or $100,000 of after-tax RSU money that’s been sold, and we then dump it into an investment account, where it builds and builds. And clients start to love that action, seeing that account get bigger and bigger over time.”
Danika noted that dispassionate automated selling can work well as part of a financial plan determined in advance, sometimes in the form of a Rule 10b5-1 trading plan if you frequently know material nonpublic information about your company. “Make it really simple so that you’re not constantly having to think about when should I sell, how should I sell, what should I wait for—removing as much as possible emotional decisions.”
Capital Gains Tax
What about the tax on capital gains when you sell shares? Avoid letting aversion to capital gains tax get in the way of your bigger-picture financial planning. “Don’t let the tax tail wag the planning dog,” quipped Megan Gorman. “I think it’s great that sometimes people focus on the tax, but sometimes you just have to sell. You pay the tax and you move on.”
Further Resources
The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. It is part of our Equity Comp Masterclass series of three webinars. For additional guidance and ideas, see the extensive resources in the section Financial Planning at myStockOptions.com, along with the website’s modeling tools and calculators for stock options, restricted stock, and restricted stock units.
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