Mar 29, 2022

It is that time of year we refer to as vest season. No, not the sweater vest, although there are plenty of those days in March. We are talking about stock vesting season. Many companies incentivize employees with shares of stock and stock options. Often these awards are given around bonus time (1st quarter) and subsequently vest 3 to 5 years later at the same time. Over time, without any planning, employees often end up with a substantial amount of company stock exposure with both vested and unvested shares and with a mix of restricted stock and options. While there is not one right answer for everyone, we have some practical tips to think through how to handle your company stock and options.

Incorporate company stock into your long-term plan. This seems simple, but often people do not include company stock in their plan because they are not sure how to value it in the future, especially unvested stock that they have not yet earned. The easier thing to do is just not include it at all. But we believe this is short sighted. Company stock should always be included in your plan even if you do not want to rely on it for retirement. At the very least, you should run scenarios under different assumptions for the future of your company stock so you can make educated decisions on if, and when, you should sell your shares.

Expert tip: Most people have a separate account set up by their employer to hold their company stock. But it doesn’t have to stay there. We recommend you transfer any vested stock into the primary brokerage or trust account you use for investing. This makes it easier to incorporate into your overall investment strategy.

Create a disciplined exit strategy. All employees will eventually want to sell some of their company stock to avoid being over concentrated. (We like to keep company stock exposure under 10%, but each plan is different). However, without a plan, employees often get stuck riding the company stock roller coaster. While the stock is performing well no one wants to sell because it keeps going up! And when the inevitable pullback happens no one wants to sell until they break even. And when the stock breaks even no one wants to sell because it keeps going up! Repeat, repeat, repeat. The only way to break this cycle is to create a disciplined plan that you will stick to. Examples are: “Sell all stock immediately upon vesting” or “Sell down to 5% overall exposure every time it hits 10%.”

Expert tip: If you find yourself having trouble sticking to a plan. Consider a covered call writing strategy. This can be an excellent way to generate income for your portfolio by selling call options, while locking in a price you are willing to sell your stock at. If the call option expires in the money, you will be forced to sell at the agreed upon price.

Give away low basis stock. If you are fortunate enough to have company stock that has performed extremely well then you may have a potential tax problem to consider if you are trying to diversify your portfolio. The good news is you can give away highly appreciated stock. It is a win-win-win scenario. You can support a charity you love, you get a full tax deduction for the amount of the stock donation, and you avoid having to pay any tax on the gains in the stock. For these three reasons, appreciated company stock should always be your first choice when giving to your favorite charity.

Expert tip: You can front load many years of stock donations using a Donor Advised Fund (DAF). These are especially useful in years when you have very high income due to a bonus, business sale, or vesting stock. During the high income year you stand to benefit the most from charitable contributions, but you may not have decided exactly where you want your contributions to go. The DAF allows you to get the full deduction for large charitable contributions in one year, while spreading the distribution of those dollars out over a few years, or many, whatever you prefer.


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