Understanding Severance Packages, Part 3: Stock Awards and Investment Portfolios
Whether it comes after a year, a decade or a whole career, being dismissed from your job is never easy. Routines are upended, relationships are disrupted, and your sense of identity may take a hit. Your next step could be a job in the same field, a new career path, an entrepreneurial project or perhaps even retirement. But while you think it over, you’ll also have some important financial issues to consider.
Welcome to the third article in a five-part series about severance-related issues that you should know about if you ever find yourself in this challenging position. Today, we look at things to consider when it comes to stock awards and your investment portfolio.
Managing your stock awards
Many companies offer long-term incentive awards to key employees. Such awards often consist of stock options, restricted stock and/or performance-based restricted stock. For some people, stock awards represent one of the largest assets on their personal balance sheet. Therefore, it’s wise to create a strategy to carefully unwind these stock positions once you’ve learned your role at work is being eliminated.
The awards have vesting schedules that may be accelerated based on the criteria in your severance package, and some awards may expire worthless. To maximize after-tax value, it’s important to account for this in your financial plan and understand the cash flow and tax implications of your stock strategy.
When restricted stock or performance-based stock awards are released, the award’s fair market value is taxed at ordinary income tax rates and reported on your pay stub. For tax purposes, your holding period begins once the shares are released to you. Consequently, selling shares immediately after release should result in a negligible capital gains tax.
If you sell within 12 months, any gain is taxed at short-term capital gains rates, which are the same as ordinary income tax rates. Waiting 12 months to sell after shares are released means any gain will be taxed at long-term capital gains rates (federal and potentially state).1
Finally, you should understand the impact of additional released company stock on your portfolio’s concentration in that stock. If you’re entering retirement, we recommend limiting concentration in a single stock to no more than 15% of your overall investment portfolio in order to keep yourself adequately diversified.
Maintain an appropriate investment portfolio
A well-constructed investment portfolio is key to long-term financial success and should reflect any stock awards you may receive. Your portfolio is critical to building and preserving wealth and should be designed to fit your cash flow needs, time horizon, risk tolerance and tax objectives. We believe that successful investing requires a long-term perspective and disciplined approach that avoids short-term emotional mistakes.
A comprehensive strategic asset allocation should form the foundation of any portfolio. At your workplace, most of your investment assets might be concentrated in the company 401(k) plan, with limited investment choices. After your separation date, it would be very beneficial to work with a qualified wealth advisor who can help you restructure your affairs.
For example, you may roll your retirement assets into an IRA with many investment choices to help achieve an optimal asset allocation. While having this flexibility is nice, it can be a big task to sift through all the possibilities and arrive at a suitable portfolio. A wealth advisor can help you narrow your options and align your choices with your stage of life and desired mix of investments, cash flow planning and tax minimization opportunities.
We’re here to help
Over the years, our team has helped many executives and professionals navigate the complicated and often overwhelming severance process. We’ll develop a personalized strategy, including investment recommendations, to help you make the most of your severance package and position your finances for long-term success.
If you have questions regarding your company stock awards and investment portfolio, please contact a Corient Wealth Advisor today.
Other topics in this series
ABOUT THE AUTHOR
Lisa is a Partner, Wealth Advisor in our Atlanta office. She joined legacy firm Brightworth in 2005 and became a Partner in 2010. In addition to working with clients, Lisa has published three books: Girl Talk, Money Talk. The Smart Girl’s Guide to Money After College; Girl Talk, Money Talk II. Financially Fit and Fabulous in Your 40s and 50s; and legacy firm Brightworth’s first book, Building Your Wealth Inside Corporate America. Lisa has been featured in The New York Times, The Wall Street Journal, YahooFinance, CNBC.com, and many more, and frequently speaks at seminars across the country.
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