Make sense of all those restricted stock (RSU), stock options, and stock purchase plans (ESPP) into a plan that can most benefit you.

• Restricted stock units (02:58): become immediately taxable in the year they vest (04:32)
• Stock options: don't incur taxation when they vest (06:33)
• Stock purchase plans: buying into your company's stock at a discount (09:12)

Quote for the episode: "What you can do is really make sure you're paying attention to this balance of being tax efficient versus being overly concentrated, and therefore kind of exposed to how one company may be doing or perceived to do."

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC.  TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Welcome to the Enjoy More 30s: Family Finance

podcast, the only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

that tend to weigh on us, stress us out and distract our focus

from simply enjoying life.

Welcome once again to the Enjoy More 30s: Family

Finance podcast. This is the last episode of this series

before the recap, and this would be the "Your Money Multiplier"

series. And today's episode is entitled "Stock Option Mayhem!".

So today, what we're going to cover is what you need to know

when it comes to making sense of all these different restricted

stock, stock options, stock purchase plans, and what you can

do to build them into more of a comprehensive plan or approach,

that can therefore most benefit you. These are definitely things

that, you know, stress people out or make people uneasy on how

they should be approaching it or what the tax ramifications might

be. And so this is a great, great episode for people that do

deal with these kind of stock options and associated pieces.

So my daughter Avery was my first child, she was born back

in 2016. And I can still remember leaving the hospital,

they walk you to the door, my wife Lauren's in the wheelchair,

we're holding this little baby that we're parenting for two

days. And we know that she's super important. She's really,

really valuable. And they get you to the door, the sliding

doors open, the fresh air hits you in the face. And then

they're like, "Okay, well get out of the wheelchair now. There

you go, on your way, good luck." And you know, hopefully you know

enough from that 15 minute class we gave you to keep your

daughter alive. And you get into the car and you drive home and

you look in the rearview mirror about 1,000 times and make sure

she's doing okay back there, and her car seat which is barely,

barely small enough to fit her.

And this kind of mentality of being given something that's

very important, but not quite sure of what we need to be doing

with it exactly. That relates a lot to how you may be feeling

when it comes to these, you know, stock options and things

of that nature, it'd be very much along the same lines. Hey,

here are these you know, special gifts we're giving to you. They

sound pretty fancy and important. Here's a 20 page

document of legalese on how they work, or at least how to cover

us if you don't use them properly. And you're welcome and

good luck. Now, the great thing when it comes to stock options,

as opposed to my daughter, is you can't kill them really. You

know, this is extra income that's coming to you, or an

extra potential benefit that's coming to you. So we just want

to make the best use of this gift that was given to us. And

so that's what this episode today, we're going to run

through to try to help.

We're going to start with what most people get nowadays, which

are called restricted stock units, or sometimes a lot of

times are abbreviated as RSUs. They're a little bit more

straightforward than some of the other things that you may

already have or may be given. And they attach to kind of a

brokerage account. So if you have these and you've been given

maybe a confusing statement on it, you'll see two sections.

You'll see the first kind of page section that'll have your

name on it. And a lot of times it'll say TOD, transfer on

death, kind of account they seem to set up for a lot of people.

But it's an account that's in your name that has little to

nothing in it to start. The second, or subsequent pages,

you'll start to see these restricted stocks broken down.

And it'll show you what date it was given to you, and then

they'll talk about when it's vesting. Generally, vesting

occurs in three years. What vesting means is just now it

becomes yours. So let's say you got given 100 shares, and it

vests in three years. Right now there's no value to it, because

it's not yours yet. They gave you basically a promise to

transfer this to you in three years, if that's the day that it

vests. Three years go by, these 100 shares vest, and then what

happens for most people is all of a sudden now on that first

page that we started with, where it just has your name on it- a

general account, all of a sudden you see this 100 shares show up

in your first account. This is great. Now you see this money is

here and now you can actually kind of touch it.

The big thing first off to know when it comes to restricted

stock is when this vesting occurs, it is now 100% taxable

in that year. You can't control it, you can't adjust it. If

those 100 shares the value at that three year part or three

year day was $10 a share, so 100 times 10, $1,000 is being added

to your income. That's it, can't change that at all. As the stock

now changes in value from that point, now that will affect any

subsequent gains you might have to pay on it, but the bulk of

what you're going to owe from a tax standpoint is going to be

ordinary income, just like your wages, in that year that it

vests. Some people, what they have, we've seen is these

restricted stocks, they don't even transfer the shares, they

just immediately sell out of them and send you a check. So

that might be how yours works as well. The most important part of

this first part of what we've covered is, if you have

restricted stock, whenever it vests, it's going to become

immediately taxable in that year.

The next part of this, if it does transfer as individual

stock, this is something that we always caution people about. A

lot of people have, you know, if you work for your company, if

you've been there long enough, where you're starting to get

some of these additional benefits that are being given to

you, you may have a strong affinity for your company.

However, being cautious about keeping money in any individual

stock, your company or otherwise, is something that we

always caution against because you're putting a lot of your

eggs in one basket. How your company does or is perceived to

do now is extremely influential on how much value this has. So

RSUs are much easier to get out of your company stock right

away, because again, it's already been taxed. So since

it's already been taxed, you can take that money out, you could

put it into a general account, and you can diversify it out

much more than just one individual company stock is.

Stock options are way more confusing. So graduating from

restricted stock to stock options. Less people have these

now, because the tax rules for what companies were able to do

changed, so the stock option is less beneficial to the issuing

company, so that's why you don't see them as much anymore. But

what makes them more confusing is they don't incur taxation,

when they vest. So let's say three years is when they vest.

That's not when the taxation occurs, it occurs when you

actually exercise the option itself. So instead of having

this automatic value, there's a price that they're giving it to

you, and then an end date that you can exercise it. Kind of as

an example, let's again say you were given 100 shares. Instead

of just being given 100 shares like for how the restricted

stock works, they're giving you 100 shares and they're saying

'we're going to give it to you at a price of let's say $5 a

share.' Okay, so $5 a share, now goes three years later, now the

$5 a share went up to $10 a share. So now if you do exercise

your option, what you're getting is the difference. So they gave

it to you at five, it's now worth 10, the difference is

five, so five times 100- now you have $500 of income that's

realized. But it's not automatic, you have to exercise

it. On the flip side, let's say they gave it to you at five, and

after three years it vests and now it's worth $3 per share.

Your options are worth nothing, because they gave it to you at a

price of five, right now it's at three when you were able to sell

it. And so there is no value. You can wait and see if the

stock price goes up, but there is an end date for stock

options, so you can't just hold on to it forever.

Stock options, in my opinion, have the same issue that we

covered with the restricted stock in that you are having a

potential large holding in one company. So how that company is

perceived to do, or how they actually do, influences how the

stock does and therefore the value of it. So again, we tend

to like to get out of the stock options more quickly after

vesting. Sometimes depending on taxation, things of that nature,

we may want to wait slightly. But the goal still is to not

have too much money tied up in one individual stock. Stoc

options, you could go to a whol nother level- there's ISOs a

d nonqualified, and that'd be a whole thing that's really t

o much to get into here. But st ck options definitely are a go

d step up in complexity co pared to their restricted st

ck kind of counterparts.

The last major one that I want to cover today are stock

purchase plans. Stock purchase plans, you might see them as

ESPPs, these plans are essentially stock discount

plans. So you can buy into your company's stock at a discount.

So let's say up to maybe 15%, with a holding period that might

be one to two years. The discount that you're receiving

is taxed as ordinary income. Gains above that would be taxed

at the capital gains rate depending on how long you held

it. So again, let's say that your current stock, your current

company stock is worth $10 per share. This means that you would

be able to buy into it at $8.50 per share. Great, so you

instantly are kind of in the black- you instantly make money.

But you need to hold it for say one to two years before you can

sell it, it depends on the company's plan. You know, that's

great, I'm basically buying in below current price. But again,

it's the same kind of thing- you are tied in to how one

individual stock is doing. So while this can be appropriate

for some people, that is definitely something that needs

to be considered, and for some people if they keep doing this

and they don't sell, they can wind up with a huge

concentration in one company's individual stock. So using this,

it can be appropriate for people again. However, in my opinion,

there should be an exit plan that's part of the strategy.

So lastly, what you can do. The first thing is make sure that

you're balancing taxes verse concentration. For stock

options, for instance, maybe you don't want to realize them right

now, for example, because next year I'm going to be retired.

And so if I wait to realize them next year, my tax rate might be

much, much lower. That could definitely be a strategy.

However, as a trade off, maybe I have 90% of my money now tied up

in the stock options in this one company. So even though I may

take a little bit more of a tax hit, maybe I should sell a

little bit right now because I don't want to be so concentrated

in how one company is doing. What you can do is really make

sure you're paying attention to this balance of being tax

efficient, versus being overly concentrated, and therefore kind

of exposed to how one company may be doing or proceed to do.

The second thing for this for what you can do is plan ahead of

time. Anything that you're receiving, you know it's going

to be vesting in x amount of years. Depending on what they

gave you and everything, you know that at some point it's

going to be coming to you if you stay there. You can think about

this ahead of time, just like a bonus, what am I going to do

with this when it comes. Maybe 50% I'm going to cash out and

save, 25% I'm going to cash out and use for a vacation, the

other 25% I'm just gonna kind of hold on to. Whatever the plan

is, you can do that ahead of time. If you wait until it just

vests and then it sits there, it's going to feel like free

money, it's going to feel like it just appeared. And now you're

not considering taxes, or concentration or any larger

scale plan. You're just seeing that extra money that maybe you

feel like you found in your pocket, and you might do

something with it that you might regret. Or maybe you wouldn't

necessarily take the steps to do if you had thought about it

ahead of time.

So a recap today as this really is the hardest topic that we've

covered so far to this point. These things definitely are

confusing to everyone, but there are definitely some simplifiable

takeaways from this depending on what you may have. The two main

elements again that it comes down to are dealing with taxes

and concentration. Taxes should be planned for. RSUs, or

restricted stock, will automatically be taxed as

ordinary income upon vesting. Stock options and purchase plans

you have more control on when it is realized, when those taxes

are realized. Second element is concentration. The restricted

stock is easier to emotionally diversify out of because they

are forcing you to realize the tax upon vesting right away. So

it's not- the tax element kind of gets taken out, and so it may

be easier to diversify out of it. The other two though, can be

tempting to hold on to much longer, but again, always

remember you are paying tax on some of the gain. You're still

keeping most of it. Individual companies carry very real risk

that's tied to, again, how one company does or is perceived to

do. If the CEO has a personal scandal, that company has its

stock go down, despite the company itself probably really

not being any different in a business sense yesterday than it

is today when it was found out.

Thanks for tuning in today. As always, if you're able to

implement what we cover, that's fantastic. This episode is

definitely the most challenging to do that. But if you can, you

have less to worry about than before, and obviously you can

focus more on enjoying life. If you are wanting help with these

things though, or have questions you need help in clarifying,

check out the 'Ask Joe' section on the show's website. Again,

our website is www . enjoy more 30s .com, that's enjoy more

three zero s .com. If you enjoyed this episode, please

make sure to follow us and review us on Apple podcasts or

wherever you listen. There are literally millions of young

American families out there I'm trying to reach and help just

like you. This is the final episode. The recap, though, is

coming next week of this "Your Money Multiplier" series. And

like the last series, it's a time to take a breather, review

the last number of topics and hopefully take some level of

action, whatever it might be, to improve your financial situation

in a way that removes anxiety to allow you and your family to

focus more on enjoying life. And we never want to be losing sight

of the purpose of all these episodes. This series, unlike

the first one, was much more specific on different financial

topics and areas you may be dealing with. But the purpose is

still the same- to gain greater clarity and security about where

you are going, to have that confidence to go out and live

life. It's great as always connecting with you today and I

look forward to doing again so soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

only. They do not constitute accounting, legal, tax or other

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer or other professional before acting upon

any content or information found here first. Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

of TFS securities Inc, and TFS advisory services an SEC

registered investment advisor member FINRA/SIPC.