If you are reading this blog, you have likely gathered an abundance of new information regarding your pre-IPO stock options. Thus far, we have discussed:
- What to look out for when your company goes public
- What to do with your ISOs
- What to do with your RSUs
Now that you have successfully built a plan to navigate your stock options, what comes next? You’ll need to determine what to do with your newfound investments. Should you invest the proceeds? Are you inclined to donate to your favorite charity or non-profit? Should you save for a short-term or long-term goal?
A year of additional income for tech professionals can open the door to several planning opportunities. The question is, how can you make the most of your windfall?
Invest Funds In Socially Responsible Avenues
If you’ve always wanted to get more involved in socially responsible investing, now could be the time. You may be thinking, “what is socially responsible investing?”.
Socially Responsible Investing (SRI) is the practice of investing in companies that act in a social, cultural, and/or environmentally healthy and productive way. This practice helps to align your money with your values, all while prioritizing your financial future.
Investing intentionally has never been as easy and efficient as it is today. There are several ETFs, index funds, bond funds, mutual funds, and other securities that enable investors to build high-quality portfolios. Contrary to popular critiques, SRI funds can actually help diversify your investment allocations and increase your long-term projected rate of return.
Instead of holding your company stock options (which lacks diversification and may or may not be a socially responsible investment), you can use these investments to make an impact in the world without sacrificing your own financial success.
For many, charitable donations are a regular part of their financial lives. Charitable giving should be all about your goals and values. Finding your “why” is critically important and should help drive your entire charitable giving strategy.
Once you are clear on your goals and have established your “why”, you can turn your attention to the specifics. In some cases, donating to charitable causes will mitigate taxes in an otherwise high-income year. Qualified donations can reduce your taxable income, making it a solid strategy for years with more “0”s at the end of the paycheck.
Here are few strategies to make your charitable donations more tax-efficient:
- Donate to a 501(c)(3) Organization: This will ensure your donations are eligible for tax benefits according to the IRS.
- Donate Appreciated Assets: Consider donating shares of companies or funds that have appreciated significantly. This will help you avoid the capital gains tax implications of selling the investment.
- An Example: You own 100 shares of Tesla that you bought 2 years ago at $40 per share (value of $4,000). Today, your 100 shares are valued at $600 per share (value of $60,000). If you sold all of your shares today, you would owe taxes on the $56,000 gain (ouch!). Instead of donating $60,000 in cash to your favorite organization, you donate your shares of Tesla and avoid the taxes.
- Buch Donations: Instead of donating $5,000 per year for 4 years, donate $20,000 in one year. This maximizes tax deductions by increasing your itemized deductions in a given tax year.
- Consider Donor Advised Funds (DAFs): DAFs are like a charitable investment account. You fund it with cash, appreciated securities, your company stock, etc., can invest the funds for further tax-free growth, and then decide when to initiate the grant to the charity of your choice. DAFs are tax-efficient in that most contributions are eligible for an immediate tax deduction. Think about DAFs like a waiting room. Your investments are stored in the account and waiting until their name is called a.k.a when you initiate the grant to the charity. This brings more flexibility and control to your donation strategy, two traits particularly beneficial when dealing with stock options.
Giving should always come from your heart. The tax benefits, while important, should be a secondary consideration. With that said, it certainly does not hurt to optimize your tax situation while staying aligned with your values.
Fund Short Term Financial Goals
In addition to investing for the long term and optimizing your charitable donation strategy, you may want to consider saving for some short-term goals with your most recent windfall. It’s important to find the right balance between saving for the future, helping others, and enjoying your hard-earned money in the short term.
Some common short term goals we often see at Woven Capital:
- Down payment on a home
- Paying down student loan debt
- Home renovations
- Dream vacation
It’s important to prioritize your short-term goals and align your investment strategy to account for them. After all, we can’t make everything we do about our future self. Prioritizing your short-term desires will help you maintain balance and allow you to have a larger impact in the long term.
Work With An Advisor
As you can see, there are quite a few options when it comes to your newfound wealth. A good financial advisor will help you craft a plan that aligns your money with your personal goals and values.
At Woven Capital, we regularly meet with our current and potential clients to help them navigate the complex world of pre-IPO company stock. Not sure how you want to move forward? Let’s explore your options together in our free strategy session.