Transitioning jobs is an exhilarating yet complex experience, especially when navigating the intricacies of your stock portfolio from your previous employer. Understanding how to handle stocks during a job transition is crucial to minimizing your tax liability next filing season and setting yourself up for long-term financial success.
This blog post will explore various considerations and strategies to help you make informed decisions about your stock when changing jobs, from assessing your holdings to the best way to make a game plan for selling or holding them after you leave the company.
Step One: Assessing Your Stock Holdings
Navigating the landscape of employee stock can feel like deciphering a complex code, but breaking it down into comprehensible categories is the first step toward informed decision-making. In the tech industry, employees often encounter three primary types of stock holdings: employee stock options (ESOs), restricted stock units (RSUs), and company shares.
- Employee Stock Options (ESOs): Employee stock options grant the right to purchase a specific number of company shares at a predetermined price, known as the strike price. These options often come with a vesting schedule, which dictates when the employee can exercise them. Regarding taxation, the critical moment is the exercise of the options. At this point, the difference between the market price and the strike price is considered income and is subject to income tax and potentially capital gains tax when the shares are sold.
- Restricted Stock Units (RSUs): Restricted stock units represent a promise to deliver company shares at a future date, contingent upon meeting certain vesting conditions. Taxation for RSUs typically occurs at the time of vesting. The market value of the vested RSUs is considered taxable income, and employees are required to report it on their tax return. Once the RSUs are fully vested, any subsequent sale of the shares may incur capital gains tax.
- Company Shares: Some tech professionals may purchase company shares directly as part of an employee stock purchase plan (ESPP) or through other means. The taxation of company shares depends on various factors, including the holding period. If the shares are held for a specific duration, they may qualify for favorable capital gains tax rates.
Understanding the nuances of each stock type is essential for making informed decisions during a job transition. As you assess your stock holdings, consider not only their current value but also the potential tax implications associated with each type.
Evaluate Value and Risks
Once you know what you own (or what you’re owed), evaluate the value, potential growth, and risks associated with each stock holding, this analysis lays the foundation for deciding what to do with your stock when you leave the company.
Vesting is the process by which employees gain full ownership of their stock awards over a specified period, often tied to their tenure with the company. Understanding the intricacies of vesting is crucial in determining when you gain control over your stock holdings.
Vesting schedules can come with various conditions, such as time- or performance-based vesting. Time-based vesting occurs over a set period, while performance-based vesting may require meeting specific goals or milestones. Be sure to review the terms of your stock grants to grasp the nuances of your vesting schedule.
The moment of vesting is a pivotal point in the taxation journey of your stock holdings. For RSUs, the market value of the vested shares is considered taxable income. This income is subject to regular income tax rates. Planning for this tax liability is essential, especially if a significant portion of your compensation is tied to RSUs.
Once your shares are vested, any subsequent sale may trigger capital gains tax. The holding period, or the duration between the vesting and sale dates, influences the tax rate. Short-term capital gains incurred from selling shares held for one year or less are taxed at ordinary income tax rates. On the other hand, long-term capital gains from shares held for more than one year may qualify for favorable capital gains tax rates.
For employee stock options, taxation occurs at the time of exercise. The spread between the market price and the strike price is considered income and subject to income tax and potentially capital gains tax upon selling the shares. Understanding these tax implications is crucial for strategic decisions when managing employee stock during a job transition.
So – What Should You Do With Company Stock When You Leave Your Employer?
Now that you have all of the data in place, you can figure out the best next steps to fit your unique needs. Start by thinking through what your short and long-term goals might be.
Will you need the cash flow from your company stock as you pivot to a new career or launch a business? Or does setting it aside as part of your long-term retirement plan make the most sense? Ultimately, although there may be a “best” way to navigate employee stock during a career transition from a tax perspective, the right decision best supports your goal and needs.
That being said, here are a few things to keep in mind:
- If You Sell. You may be subject to short or long-term capital gains taxes, depending on how long you’ve held your shares, when they vested, and whether or not they’ve increased in value. If your shares have lost value, this may present a unique tax planning opportunity.
- If You Hold. Sometimes, holding your company shares may make the most sense if you face a hefty tax bill. In these cases, ensure you have a game plan to eventually rebalance your portfolio to avoid overconcentration issues.
- Stock Buyback Programs. Some employers offer stock buyback programs to previous employees. These programs may be beneficial if you need to offload your company stock before a job move and free up cash flow.
Seeking Professional Advice
When navigating your employee stock, especially amid a career transition, having an A-Team in your back pocket is helpful. The three primary people you should be talking to are:
- A tax specialist. Determine precisely what you’ll owe and what potential scenarios may mean for your tax liability.
- Your HR team. They’ll be able to help you clarify what types of company stock or options you have available to you and whether or not you need to exercise your options before leaving your role.
- A fee-only financial planner. Having a fee-only financial planner in your corner to help you navigate stock options and how they impact your broader financial plan and goals can be invaluable. A fee-only financial planner acts with your best interests in mind and can help you build a financial plan that balances your goals, values, cash flow needs, and tax liability to help you make empowered decisions across every area of your financial life.
Want to learn more or have questions about stock options in the midst of a career pivot? Let’s talk! Reach out to me today by clicking here.