You and Your Retirement Account

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Whether you have retired or just switching jobs, this article is for you. In this first part we will go over employee stock options and what to do with them. In the second installment we will go over your 401k, your IRA, and what to do about them. Happy investing

Most people, at some point in their career find themselves changing jobs at least once. Long gone are the days when one stayed in his/hers job from fresh out of college to retirement. The reason for this is not something we will get into in this article. This is for those who find themselves with some sort of retirement plan that needs their attention.
Quite often, part of an individual’s compensation comes in the form of employee stock options. If you have not been given stock options, or the opportunity to purchase them, you will probably have heard of them, but not heard enough to appreciate what a wonderful product you have here.
Employee stock options are shares of the company’s own stock, and are often free, or at a deep discount. Employee stock options are often used as tools other than cash to attract top industry talent.
Here is an example of what one’s compensation package may entail. For the purpose of this article let’s just say that IBM is selling for twenty dollars a share. Fred has just been offered the option to buy one thousand shares of his company’s stock for sixteen dollars a share.
So that does that mean for Fred? He can purchase a few chairs or all one thousand of them at the discounted price of found of sixteen, or sixteen thousand dollars. Fred can now sell all or part of his shares at the new market price of twenty dollars a share. Now there is a risk here. Your stock options will have an expiration date, and it is possible for them to expire worthless.  
The more value a company places on their new hire, the deeper the discounted the stock price will be. Quite often a new employee will be given stock options for just pennies a share, but that is generally reserved for the upper echelons of the companies personal.
One must always keep an eye on his/hers options less they do expire worthless. I recall on particularly sad story involving a young woman and her stock options. As the expiration date drew near, several of us made numerous attempts to contact her. We even filled up her answering machine warning her about the upcoming expiration date. She had a large number of shares and was not in the position where she could afford to lose out on that money. Each phone call ended with some variation of “I don’t have time to deal with this now. I will call you when I am ready.”
She finally did call us back and I happened to hear part of that phone conversation and it was not pretty. She had just lost over two hundred thousand dollars and there was nothing any of us could do about it.
So what are my options when I exercise my options, and what are my tax consequences, if any?  When you decide to exercise your option, so you don’t have a disaster like the individual above, you have two basic choices.
·         Exercise and hold.
·         Exercise and Sell
 If you decide to exercise your options and there is a difference between the grant price (that is the cost of the shares that were granted to you) and the market price of the stock when you exercise, you will have a tax consequence and you need to talk to your tax professional.
If you decide to exercise your options and buy them (you pay the grant price) then of course you will have to pay taxes on the gain, or difference between the grant price and the market price of the stock the day you exercise them.
Here is a short example. Fred, when hired by Xoomoo Tech. was given a thousand shares of the company’s stock at one dollar a share and he is thrilled because the current market price was five dollars a share. Fred is required to hold his shares for two years before he is able to exericise.Two years later Fred decides to exercise his employee stock options, and he would like to exercise all one thousand shares. Fred pays one thousand dollars (a figure based his grant price and the number of shares exercised). Seeing that Xoomoo is trading at six dollars a share, he decides to lock in the profit and sell his shares on the market. Fred just made five thousand dollars, but has a long term taxable gain of five thousand dollars. If Fred had chosen to hold on to his shares, it is still a taxable event as Fred has a paper gain of five thousand dollars. Contact your tax professional.
Alright, so now you know just a little more about your retirement account, so in the second issue in this series we will cover what your options are with regards to leaving your account as is, or change into a self directed retirement account.
Happy Investing.

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