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It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity. Stock options and employee stock purchase programs can be good opportunities to help build potential financial wealth. When managed properly, these benefits can help pay for future college expenses, retirement, or even a vacation home.
Ultimately, they lose out on the many benefits these stock option plans can potentially provide. To help ensure that you maximize your stock option benefits, avoid making these six common mistakes:. Typically, there is a vesting period ranging from one to four years, and you may have up to 10 years in which to exercise your options to buy the stock.
Delaying will allow you to postpone any tax impact of the exchange, and could increase the gains you realize if you exercise and then sell the shares. But stock option grants are a use-it-or-lose it proposition, which means you must exercise your options before the end of the expiration period. When this happens, you could end up leaving money on the table, with no recourse. In some cases, in-the-money options expire worthless because employees simply forget about the deadline.
In other cases, employees may plan to exercise on the last possible day, but may get distracted and therefore fail to take necessary action. Monitor your vesting schedule, keep your contact information updated, and respond to any reminders you receive from your employer or stock plan administrator. There are two kinds of stock option grants: You must hold your shares at least one year from the date of the exercise and two years from the grant date to qualify for the long-term capital gains rate.
If you sell ISO shares before the required holding period, this is known as a disqualifying disposition. In such a case, the difference between the fair market value of the stock at exercise the strike price and the grant price—or the entire amount of gain on the sale, if less—will be taxed as ordinary income, and any remaining gain is taxed as a capital gain.
For most people, their ordinary income tax rate is higher than the long-term capital gains tax rate. While taxes are important, they should not be your sole consideration. Consult with a tax advisor before you exercise options or sell company stock acquired through an equity compensation plan.
While you may receive a severance package that lasts six months or more, do not confuse the terms of that package with the expiration date on your stock option grants. If your company is acquired by a competitor or merges with another company, your vesting could be accelerated.
In some cases, you might have the opportunity to immediately exercise your options. However, be sure to check the terms of the merger or acquisition before acting. Contact HR for details on your stock option grants before you leave your employer, or if your company merges with another company. Earning compensation in the form of company stock or options to buy company stock can be highly lucrative, especially when you work for a company whose stock price has been rising for a long time.
At the same time, you should consider whether you have too much of your personal wealth tied to a single stock. There are two main reasons. From an investment perspective, having your investments highly concentrated in a single stock, rather than in a diversified portfolio, exposes you to excess volatility, based on that one company.
Moreover, when that company is also your employer, your financial well-being is already highly concentrated in the fortunes of that company in the form of your job, your paycheck, and your benefits, and possibly even your retirement savings.
More recently, Lehman Brothers employees shared a similar fate. Consider, too, that income from your employer pays your nondiscretionary monthly bills and your health insurance. Consult with a financial advisor to ensure that your investments are appropriately diversified.
Unfortunately, some employees fail to take advantage of their company's ESPP. If you are not participating, you may want to give your ESPP a second look. Depending on the discount your company offers, you could be passing on the opportunity to buy your company's stock at a significant discount. Look at your current savings strategy—including emergency fund and retirement savings—and consider putting some of your savings in an ESPP.
You may be able to use future raises to fund the plan without impacting your lifestyle. As with your k plan or any IRAs you own, your beneficiary designation form allows you to determine who will receive your assets when you die—outside of your will. Each time you receive an equity award, your employer will ask you to fill out a beneficiary form. Many grants range in life from three to ten years, during which time many factors can change in your life.
For example, if you were single when you received an option grant, you may have named a sibling as the beneficiary. The same holds true if you were married and got divorced, or divorced and remarried.
Review your beneficiaries for your equity awards—as well as your retirement accounts—on an annual basis. Get a weekly subscription of our experts' current thinking on the financial markets, investing trends, and personal finance. Please enter a valid name. First and Last name are required. Full name should not exceed 75 characters. Enter a valid email address. Email address must be 5 characters at minimum. Email address can not exceed characters.
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