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Most options are fully vested after the third or fourth year, according to a recent survey by consultants Watson Wyatt Worldwide.
Whenever the stock's market value is greater than the option price, the option is said to be "in the money. During times of stock market volatility, a company may reprice its options, allowing employees to exchange underwater options for ones that are in the money. It may sound like cheating, but it's perfectly legal. Outside investors, however, generally frown upon the practice -- after all, they have no repricing opportunity when the value of their own shares drops. We're no longer maintaining this page.
Getting a job Getting a job k s k s: Starting to invest k s: Early withdrawals and loans k s: Rollovers k s: Retirement distributions Taxes Taxes you owe Income tax penalties The Alternative Minimum Tax Tax audits Health insurance Choosing a plan Where to buy coverage Finding affordable coverage Employee stock options Employee stock options Employee stock option plans Exercising stock options. Buying a car Buying a car Buying a car Determining your car budget Buying a new car Buying a used car Car insurance Car insurance policies.
Starting to invest Starting to invest Stocks Investing in stocks Stock values Bonds Investing in bonds How to buy bonds Types of bonds Bond investing risks Mutual funds Investing in mutual funds How to pick mutual funds Stock funds Bond funds Asset allocation Asset allocation Hiring financial help Hiring financial help How to hire a financial planner. Buying a home Buying a home Buying a home Buying a home Selling a home Selling a home Home insurance Homeowners insurance policies Picking a home insurance company Filing a home insurance claim.
Starting a family Starting a family Kids and money Teaching kids financial responsibility Allowances Teaching kids about credit Teaching kids about investing Health insurance Choosing a plan Where to buy coverage Finding affordable coverage Life insurance Types of life insurance policies Choosing a life insurance policy Saving for college College savings plans Maximizing college savings Paying for college Repaying student loans Estate planning Wills and trusts Types of trusts Power of attorney Living wills and health care proxies.
Getting started Goals Setting financial goals. Banking Opening a bank account. Alternatives to traditional banks. Money market deposit accounts and CDs. Spending Making a budget.
Debt Paying off debt. Credit reports and credit scores. Taxes Taxes you owe.
Income tax penalties. The Alternative Minimum Tax. Health insurance Choosing a plan. Where to buy coverage. Finding affordable coverage. Employee stock options Employee stock options. Employee stock option plans. Exercising stock options.
Buying a car Determining your car budget. Buying a used car. Car insurance Car insurance policies. Stocks Investing in stocks. Bonds Investing in bonds. Bond investing risks.
Mutual funds Investing in mutual funds. How to pick mutual funds. Asset allocation Asset allocation. Hiring financial help Hiring financial help. How to hire a financial planner. Buying a home Buying a home. For this reason, some financial professionals suggest not even investing at all in the industry you work in much less your employer.
So how much is too much? If you have high-interest debt like credit cards, you'll probably save more in interest by paying them down than what you'd likely earn by holding on to your options. Beefing up your emergency fund to months of necessary expenses could be another good choice. In the unfortunate event that something did happen to your company, you'll be glad you have some savings rather than underwater options. Diversifying the money into mutual funds or other stocks keeps you invested while significantly reducing your risk. If you haven't maxed out tax-sheltered accounts like a Roth or traditional IRA, you could use the proceeds from your options to fund them.
You still have until April 15th to contribute for last year. Well, Uncle Sam will want his cut, but the amount can vary. If you have non-qualified stock options, you'll have to pay payroll and regular income tax rates on it. You can use this calculator to estimate what your tax would be. On the other hand, if you have incentive stock options, there are more possibilities.
If you exercise the option and sell the stock in the same year, you'll pay regular income tax rates just like with the nonqualified stock options, but no payroll taxes. However, you may owe alternative minimum tax under this scenario so consider consulting with a tax professional. With either type of option, there could be some reasons to delay.
But don't let the tax tail wag the dog.
These tax benefits can be outweighed by the risks of having too much in company stock or the benefits of using the proceeds to pay down debt, build up an emergency fund, or fund tax-advantaged retirement accounts. The important thing is to understand each of your options pun intended to decide what makes the most sense for you.
Consider asking your employer if they offer access to unbiased financial professionals to help you make your decision. I'm a Senior Resident Financial Planner at Financial Finesse, primarily responsible for providing financial education and guidance to employees of our corporate clients.
I also lead the team that develops our content on Forbes and regularly provide commentary on personal finance topics to a variety of media outlets, including CNBC, Fox Business, and Time Magazine. Prior to joining Financial Finesse, I held several different investment advisory and consulting positions with a focus on high net worth clients, including advising members of Congress and serving as a vice president in the private client services division of a major national investment firm. I earned a B. I'm available for speaking opportunities on personal finance issues.
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