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Education Center » 9 planning rules everyone with stock options needs to know

9 planning rules everyone with stock options needs to know


Managing your stock options can be challenging. To get the most out of your company’s stock plan, consider the following points.

1. Set goals

In granting your stock options, restricted stock or the right to buy shares in an employee stock purchase plan, your company has provided you with awards that have the potential to increase your loyalty to the company. Understanding the awards’ value and how they fit into your overall financial plans is important. Your planning should start with setting goals. Consider what you want to do with the proceeds from the eventual sale of the stock and when you might need to use that money. Are you hoping to pay for home repairs or renovations in two years, or your child’s college education, or to invest for retirement? These decisions will help you assess the role these awards will play in relation to your other income and savings.

2. Develop an overall plan

Your planning should start with setting goals. Consider what you want to do with the proceeds from the sale of the stock.

To strategically manage your awards, you should become familiar with the choices you can make regarding the term of your stock options and the potential tax consequences of your decisions. To pursue your goals, you’ll need to decide when to exercise your options and sell your shares. You may benefit by staggering the exercises and subsequent sales over a period of years to spread out the taxes. Simply deciding at the beginning or end of each year when to exercise and sell options may not be the best approach. Plus, keep in mind that if you do not keep track of expiration dates, in-the-money options may expire unexercised.

3. Accurately value your stock options

The intricacies of the tax treatment of your stock options can easily catch you by surprise. You may forget to discount the value of the stock option by either the exercise price or taxes. For example, the option to buy at $50 per share 1,000 shares of your company’s stock that is now trading at $100 may first appear to be the equivalent of a $100,000 investment (1,000 shares x $100 current price). However, in the end you may net considerably less after paying the $50 exercise price; fees; commissions; federal, state and local income taxes, and payroll taxes (if applicable) combined. With the commonly granted nonqualified stock options (NQSOs), and assuming you are an employee (not an independent contractor), your company will withhold federal taxes at the supplemental wage withholding rates (generally, 22%) plus payroll and state taxes when you exercise those options.

4. Evaluate when to exercise your options

Stock option grants typically give you the right to exercise and purchase the underlying shares of stock up to 10 years in the future. When to exercise your options is an individual decision and should be based on your personal situation. Several factors should go into making your decision.

While it may seem overwhelming, you should carefully review the communications and documents that your employer provides to explain your options.

First, consider the outlook for your company. If you believe its prospects are good, it might make sense for you to wait to exercise the options. By waiting, you can potentially leverage upside potential without any cash investment, and the spread between your exercise price and the stock price would have the potential to grow without immediate taxation. Of course, taxes for NQSOs would be due upon exercise, regardless of timing.

Next, weigh any potential benefit against your goals and needs. Depending on how large a role your stock options play in your overall portfolio, it might be more appropriate to diversify your investments. Keep in mind that diversification does not ensure a profit or protect against loss. In addition, your company may have stock ownership guidelines that will require you to exercise and hold the shares for a specified time period.

Finally, if your company’s stock is volatile — with price swings that don’t align with your comfort level for risk — you may want to consider exercising and selling earlier.

Of course, if you work for a public company, you are generally prohibited from selling company stock when you have access to inside information. Become familiar with your company’s blackout and pre-clearance trading rules, which could have an impact on the timing of any stock sales.

5. Read the documentation you receive about your stock options

Concentrated man reading printed article, education at home

While it may seem overwhelming, you should carefully review the communications and documents that your employer provides to explain your options. If your plan is through Merrill, some of these documents may be available in the Document Library on Benefits OnLine®.

These documents will help you understand the steps you need to take to manage your awards. They should also help you understand your rights if you are fired or if you quit, leave your company to work for a competitor, retire, become disabled or die. Many plans give you no more than 90 days to exercise vested options after job termination without cause or for retirement or disability, though the post-termination exercise period can be longer. However, you may forfeit vested and unvested options immediately if you leave the company to work for a direct competitor. Make sure you, as well as your family and financial advisor or tax professional, are aware of these provisions.

6. If you have ISOs, learn about AMT

If you ignore the risk of AMT, you may need to pay tax on paper gains from your exercise before you even sell the stock. Be sure to consult with your tax professional.

Your decision to exercise and hold your company stock may be impacted by the type of options you received. If you received NQSOs, when you exercise you will owe tax at your federal ordinary income rate on the spread between the option exercise and market price, whether or not you immediately sell the stock. However, if you have incentive stock options (ISOs), you may qualify for potentially more favorable tax treatment that arises if you plan to exercise the options and sell the stock more than two years from the grant date and more than one year from exercise. However, the alternative minimum tax (AMT) may result in federal taxable income when you exercise your ISOs.

Understanding how the AMT affects ISOs may help you avoid undesired tax consequences. Be sure to consult with your tax professional on this and other rules before making any decisions on your awards.

7. Determine tax rates

Most stock options generate ordinary taxable income when exercised, either because they are NQSOs or because the ISO stock is immediately sold after exercise. Work with your tax professional to determine your tax rate so that you can plan for any estimated tax payments and analyze whether you want to take all the income in one year or spread it out over several years.

8. Focus on sale restrictions

If you’ve received options that are immediately exercisable, you should determine whether they have sale restrictions that lapse over time. If so, you may need to put up the cash to exercise them and then hold the shares.

9. Get guidance

Young couple getting advice from financial expert

Guidance from experienced professionals can help you make informed decisions about your stock options that could improve your overall financial results. While there are many things to consider when selecting an advisor, if you receive stock options and other equity awards from your employer, you may want to ask how much experience the advisor has working with clients in similar financial situations — including management of stock options, restricted stock and restricted stock units (RSUs) or employee stock purchase plans (ESPPs).

If you are already working with a financial professional, don’t hesitate to ask for validation if they seem unsure of the actions you should take regarding your awards. It’s a lot easier to ask the questions up front than it is to try to undo a potentially costly tactical mistake.

Learn more and take action

  • If your equity awards are through Merrill, to model — or model and exercise — your stock options on Benefits OnLine®, follow the instructions in this guide.
  • You should always consult your financial or tax professional before making any decisions concerning your awards.


Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.