We never want to let taxes drive our decisions, however they can be an influence, especially if you receive company stock.
Various types of stock awards are taxed differently and it is important to understand how they are taxed in order to make the best decisions on when to sell.
First, I encourage you NOT to think too much about what price your company’s stock is at when developing your plan to sell.
Assuming this stock is a significant portion of your overall investments – say, greater than 10% – you are taking inordinate risk by continuing to hold it.
Not only could the stock go down if the company gets into trouble, but you could lose your job as well. That is a concentration of risk we really need to think about!
Second, be sure to approach this issue from the following perspective: a desire to sell as much stock as possible while minimizing the tax cost.
We want to reduce our exposure as much as possible in order to get more diversified in our long-term investments. The cost to doing this is primarily the taxes we will pay to get there.
So, we need to see how much stock we have currently and how much tax we will owe as we sell.
Once we see the total cost we will have to pay, we can determine the time period over which we feel comfortable paying it.
Remember, this tax cost is actually being paid by the proceeds of the stock sale – which will always be enough to pay it!
If, for example, you have a total tax cost of $100,000 and you want to pay it over four years, then you know you will be paying $25,000 this year.
The next step is to figure out which stock to sell that will make the biggest reduction in your exposure in exchange for paying the $25,000 cost this year.
This can be done and will really help you minimize your cost and maximize your diversification over a reasonable period of time.
For more details, check out a deeper analysis at www.BestFinLife. com/blog, but in this space I want to simply make the point that this can be very important.
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Best Financial Life is a Registered Investment Advisor with the State of California and Joe Morgan is a fiduciary to his clients at all times. If you’d like to ensure your finances are on the right track, schedule a call with Joe at www.calendly.com/bestfinlife.
By Joe Morgan, CFP®, CFA, Principal: Best Financial Life, Resident since 2004