8 Typical Stock Option Mistakes to Avoid, Ep #203

On the 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 given most people don’t have a class in high school that provides pointers on how to handle when they vest.

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, they’re often put on the back burner and can easily be forgotten about causing you to miss out on a valuable opportunity to increase your wealth.

If you have been offered stock options with your company, you’ll want to hear these 8 common mistakes to avoid when managing your stock options.

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 how those rules impact your specific stock options.

8 common stock option mistakes people make

  1. 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.
  2. They misunderstand the taxes. The value of your Non-Qualified Stock options are taxed at your ordinary income rates plus FICA taxes. If they are Incentive Stock Options, there is more nuance, and could be eligible for capital gains treatment if held long enough, but you also need to consider the possible AMT impact.  See the link below comparing NQSO to ISOs for more detail.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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, as well as additional stock benefits you are slated to receive. A good financial plan will help you understand when you need to sell.
  8. 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 Mentioned:

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