By Thomas Britt
For over 20 years, I have had the pleasure of executing financial plans for a number of Pfizer employees when their incentive stock options (ISOs) or nonqualified stock options (QOs) became vested. It can be an exciting season, and if done correctly, can yield incredible financial opportunities.
However, in order for these options to be a blessing and not a curse, they need to be treated carefully and deliberately. There are 3 paths to choose from when it comes to exercising stock options:
- You can hold on to the options.
- You can exercise your options and hold the stock.
- You can exercise the options and then immediately sell the stock.
None of the choices listed here are inherently better than the others. It’s important to take into consideration your current financial standing and your long-term strategy when deciding which path is best for you.Let’s unpack the different options and why each one might make sense for you.
Path 1: Hang Tight and Plan
The first option has a singular but powerful purpose, and that is to allow you time to plan. Jumping into exercising your ISOs/QOs can put a lot of strain on your liquid cash assets. On the other hand, cashing them out immediately can expose you to tremendous tax liabilities.
Because you have about 10 years to exercise your ISOs/QOs, you don’t have to make a move right away. If you don’t have a solid plan, appropriate resources to exercise, or if you are in a disadvantageous tax situation to cash out, then waiting may be the right move.
But waiting doesn’t mean that you aren’t taking action! Now is the time to put a plan in place, setting time frames for when and how much you will exercise. Further, you need to consider your larger financial goals and plans and optimize your ISO/QO strategy in such a way that it enhances the big picture. For example, you may have 10 years to use your options, but if you are scheduled to retire in 5 years, then it’s important that your plan takes this into consideration.
Path 2: Exercise and Hold
Because of the way selling stock is taxed, ideally you always want to hold it long enough for it to become qualified. Basically, the rule is that if you sell your stock within one year of exercising your option, or within 2 years of it being granted, then your gains will be considered unqualified and subject to standard income tax. This is not a favorable tax situation.
Comparably, if you are 2 years past the grant date and 1 year past your exercise date, then your gains are now considered qualified and are subject to long-term capital gains taxes. This is a very favorable tax situation.
The difficulty lies in fronting the cash to purchase your options. If you are buying 5,000 shares at $20/share, that’s $100,000 (which is the legal annual limit). If you have $100k of liquid assets that you can tie up for a year, then this may not be a problem. However many people have their money working for them in other long-term investments, making this difficult.
One way to handle this is to utilize what is called a cashless hold, where you cash out just enough of the stock to pay for the whole option. You will be subject to standard income on whatever you cash out, but the rest of the stock you can hold on to until it is qualified, or even longer if it makes sense for your plan.
Path 3: Make the Cash Grab
Finally, as long as your options cost less than the stock is worth, this might be an opportune time to make the most of these additional funds. Maybe you have been thinking about buying a boat or upgrading to a bigger house and cashing in may seem like a good way to fund these dreams. It’s possible; however, easy isn’t always best, and fast isn’t always wise.
There are certainly times when this is the best path to take. Perhaps you find yourself in a crisis at the same time the options are vested, or maybe you find yourself preparing to leave the company unexpectedly and needing to exercise your options before they expire. Regardless of your particular circumstances, to ensure that exercising options makes the most sense at any given time it’s important that all aspects of your financial landscape be considered to avoid unnecessary tax implications.
Getting Expert Help
This article touches on only a small part of what really should be a much larger discussion with a financial planner. As you can see, there are many considerations when handling your Pfizer stock options. If you need help navigating through this phase of your wealth management, I have the experience and expertise you need on your side.
Together we can walk through your options and custom tailor a strategy to work for your specific situation. To arrange a consultation, call 860.434.6890 today, or email me at email@example.com.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and holds the Master Planner Advanced StudiesSM (MPAS®), Certified Investment Management Analyst (CIMA®), and Chartered Retirement Planning Counselor (CRPC®) designations. He earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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