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Ep. 59 - Tips for Retiring With Employee Stock Purchase Plans

Today we are getting back to business and in this episode, we are back to one of several episodes that I have been doing that focus on retiring with equity compensation. There's too much to cover in one episode, especially since mine is pretty short. Blame the GenX lack of attention span I guess. In reality, I just wanted to break these up so you can pick and choose which to listen to since it’s unlikely that all will apply to each of you.

We'll talk about employee stock purchase plans today, but I'll just call it ESPP. I know there are others but we will stick with non-qualified stock options, restricted stock awards, restricted stock units, and employee stock purchase plans for these episodes. Most of you will have some combination of these types of equity compensation. DISCLAIMER: These may sound slightly repetitive if you’ve listened to them back to back as there is some overlap between each type of equity compensation.

You will want to hear this episode if you are interested in...

  • The things to do first [1:59]
  • What form does your ESPP take? [6:24]
  • Nonqualified ESPPs [6:44]
  • Qualified ESPPs [7:20]
  • Disqualifying dispositions [11:47]
  • Pulling it all together [14:41]
  • This week’s FLASHBACK [16:09] 

Things that stay the same 

Like I mentioned some things are going to carry from each type of compensation option. And this is a list of those things. 

First things first, before anything else, and specifically anything with equity compensation, is to look at your spending. A theme I repeat too often is unless you know your spending number, I cannot tell you if you have enough savings for retirement. Spend a bit of time taking a look at what you spend.

Your next task is to gather up numbers on your entire financial net worth. This includes balances for your 401k, Roth IRA, regular old IRA, taxable accounts, and savings accounts. I would also say to bring in things like social security estimates and your pension from work if you have one. You will also want to include the value of your equity compensation positions in this overall net worth number.

Now that you have done the prep work, this tip is to assess your restricted stock units and look at your concentrated risk. How much of your net worth is in one or a few holdings, in this case, company stock? 

Then identify and track the various cost basis lots for all of your company stock identifying the costs basis. This will be key when you get ready to dispose of shares.

Your final tip is circling back to identifying how much you're projecting to spend in retirement. Try and project out big planned spending numbers. Things like needing a new roof, wedding costs, a big vacation, or whatever that big planned expense may be. These are one-time expenses but too often I see people not consider them as expenses because they're not ongoing.

Which is which and which ESPP do you have? 

There are two forms of ESPP, qualified, which is more common, and nonqualified, which is more simple. With nonqualified plans, there is no special tax treatment for them. If you pay full price for the shares in this type of plan they're treated as if you bought them in the stock market. Nothing to report and gains and losses are treated as capital gains or losses. Easy peasy. If you pay less to acquire the shares than the actual value at the time of purchase this difference is treated as compensation income. This compensation income will be reported as wages on your W-2 and there will be withholdings.

For qualified ESPPs, there is nothing to report when you acquire the stock, even if you bought it at a discount. Additionally, there is no income on your tax return and no AMT either. Your employer will provide you a form 3922 for the year of the ESPP stock purchase. However, you don't do anything with the form until you dispose of the shares. There are some odd rules that will come into play down the road when you dispose of them. Qualified ESPPs are often called 423 plans. A critically important bit of information to know about your tax qualified ESPP is your holding period. The tax treatment of a sale depends on how long you hold the shares. The holding period requirement is met on the latter of two dates, either two years after the company granted the option or one year after you received or purchased the stock.

This week’s FLASHBACK: BMX jumps

How many of you had a BMX when you were a kid? Did you set up ramps on your street? We did this all the time in my neighborhood. Not that any of us were good with jumps off of these homemade ramps, but we still did it. I remember lots of bad landings, wrecks, flips over the handlebars, and more. One thing that sticks out in my mind is the youngest kid in the neighborhood, he was someone's little brother. 

We tried desperately to stop him from jumping because he would never get up off his seat when he jumped which caused lots of hard landings and a lot of pain in his private parts. He kept doing the jumps because his older brother was doing them. He just wanted to keep up with all of us, but he just wouldn't get up out of his seat. Eventually, we'd shut the jumps down because he wouldn't stop trying and every time he did it, he hurt himself and it made the rest of us hurt just watching him. 

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.