Can you really have too much of a good thing? Yes!

The road to riches 

If you find yourself working for a publicly traded company, you may have noticed some interesting and important employee benefits regarding the purchase of your company stock. Two of the more popular plans include   ESPP -   E mployee   S tock  P urchase  P lan, and  RSUs -  R estricted  S tock  U nits. Note, in this article we specifically discuss ESPP and RSU plans, however there are also ISO plans, ESOPs and the ability to invest 100% of your 401(k) into company stock. Though not specifically discussed, all these plans have special tax considerations and exacerbate the issue discussed below.
 
ESPP Plans

Employee Stock Purchase Plans allow employees of the company to purchase the company’s stock at a discounted rate, usually 15%. Employees elect to have payroll deductions placed into a holding account until the purchase date, at which point the shares are purchased at the current market value less the discount. In the case of several companies, they offer a six-month offering period with a lookback provision. This allows the employee to purchase shares at the lower price between the beginning of the offering date or the end of the offering date. With an offering period of six months, this can lead to a significant price difference!

Okay, so you bought a pile of company shares at a discount, now what? How do the taxes work? It is important to understand that the 15% discount you received will be treated as ordinary income on your W-2 for the year…the IRS wants their piece! For the stock, the taxes on your gain will depend on how long you decide to hold onto it.

• Qualifying Disposition - You sell the stock 2 years after the first day of the offering period AND at least 1 year from the purchase date.
• GAIN TAXED AT FAVORABLE LONG-TERM CAPITAL GAIN RATES.
• Non-Qualifying Disposition - You sell the stock before 2 years after the first day of offering period or before 1 year from purchase date.
• GAIN TAXED AT ORDINARY INCOME RATES.

Long-Term Capital gain rates are either 0%, 15% or 20% depending on your taxable income and filing status. Ordinary Income means your marginal rate, or, the highest tax rate you’ll pay for that tax year.
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Bottom line? Timing is important for your after-tax gain. 

RSU Plans

If you are fortunate enough to have an RSU plan as part of your compensation package, here are some important points you need to consider:

• Grant Date - Date at which the RSU is awarded.
• Vesting Schedule - the timing at which the granted RSUs become vested.
• Vested - the date at which you become the owner of the granted RSUs.

Taxes on RSU plans are slightly different than ESPP plans. The fair market value (FMV) of the RSU grant upon VESTING is treated as ordinary income and reported on your W-2. Once you decide to sell the shares, your gain is either taxed as ordinary income or Long-Term Capital gains, depending on your holding period. Consider the following example:

1,000 shares granted on January 15, 2018. 25% of them (250 shares) vested on January 15, 2019. If the fair market value of your company stock on January 15, 2019 was $100, then your W-2 will reflect ordinary income of $25,000. This is now your cost basis for the stock. Consider then the following two sell dates:

• November 15, 2019 - If you sold your 250 shares in November at a FMV of say $120 ($30,000 total), then you would have $20 gain per share, or $5,000. Because your holding period was less than one year, the $5,000 would be treated as ordinary income.
• January 20, 2020 - You sold the 250 shares for $130 ($32,500 total) after holding for more than a year, then your gain of $7,500 would be treated as Long-Term Capital Gains instead of ordinary income.

 
Bottom line? Timing is important for your after-tax gain. 

How much is too much?

Now you understand two of the more popular employee stock benefit plans, you are well on your way to building a nice stockpile of company shares. But how much is ‘too much?’ ‘Rules of Thumb’ often hover around 10-15% of your overall portfolio. You must be careful and consider how much of your overall investable portfolio is concentrated in your company stock. Consider this; if the majority of your wealth is in company stock,  your living wages AND the bulk of your wealth all depend on the financial health of ONE COMPANY!

Now you might say “Austin, the odds of that happening are low, I work for a huge company!” I have two words for you:   Lehman Brothers . Lehman holds the record as the largest corporate bankruptcy in U.S. history and it happened almost overnight.

It’s hard to consider diversifying away from your company stock, especially when you have a great deal of confidence in the company you work for, I get it. What if I told you there is a way to diversify yourself away from your company, pay favorable taxes on that diversification and build a diversified portfolio that will have a greater chance of realizing your long-term goals?

Time for a plan.

The Plan 
I want you to ask yourself the following question: 

“What is the main purpose for my participation in ESPP and/or RSU plans?”

The answer will be different for everybody. Some might be saving up to buy a house, others to pay down debt, buy their dream car or simply save for retirement. How do you convert your company stock into realizing that purpose?

It is important that you sit down with a trusted advisor and discuss your different diversification strategies available to you to help realize your long-term financial goals. Your strategy may include different timing scenarios, tax-efficiency and just general pros/cons for liquidation.

If you have an over-concentration in your company stock, it is time to take the next step.  Momentum Private Wealth Management  is ready to help you build your customized diversification plan to maximize your wealth building for your long-term financial goals.  ​

If you are not having frequent conversations with your wealth or investment advisor about market strategies, investment management, or financial planning opportunities, you should be.  Momentum Private Wealth Management  specializes in Wealth Management as well as Comprehensive Financial Planning. Feel free to reach out to Austin directly at 512.416.8085 or austin@momentumpwm.com. You can also find out more information about MPWM at: www.momentumpwm.com .

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