Do you get paid strictly through your salary? Many people also may receive a considerable amount of deferred compensation, through both your stock options and your 401(k) or similar retirement plan. But are you maximizing the benefits you get from these income sources?

Let’s look at some of the key questions regarding stock options and your 401(k).

When to take options – and what to do with them

  • Should you take stock options or cash? At some point, you may need to choose between taking stock options for a later benefit or more cash now. For example, you could be offered a lower salary with more stock options or a higher salary with fewer options. Or, you might need to select either a cash bonus or stock options. Before you choose, you’ll need to think about a variety of questions including: How likely is it that the company stock will become more valuable? Is the company only offering the options as a way to lower my compensation package? If I take the higher salary or the cash bonus, could I immediately be bumped into a higher tax bracket?

  • If you take options, when should you exercise them? Once you receive stock options, you typically have between three and five years before you can actually purchase, or exercise, the shares. Your decision on whether to exercise your shares will likely depend on the actual price of the stock. So, if the current stock price is $100 per share and your “strike” price (the price at which your option allows you to buy actual stock shares) is $75, you could buy the shares at $75 each and immediately sell them for $100 apiece, thereby achieving a $25 per share profit. Again, though, you’ll have questions: What are the tax implications of exercising my options? If I wait longer, will the price rise even further? How long can I wait before my options expire?

  • What should you do with the proceeds of your exercised options? After you exercise your options and sell the shares, what should you do with the proceeds? You could buy a car or take a trip, of course, but just how much could this money help you with your long-term goals? Can you use it to help diversify your investment portfolio? Can you greatly add to your retirement accounts? Should you invest some of it in a college savings vehicle for your children or grandchildren?

Managing your 401(k) over the years

Another key component of your deferred compensation package is your 401(k) or similar retirement plan. And your 401(k) also comes with some questions you’ll want to answer to get the most out of your plan.

  • How much company stock do you have in your 401(k)? You may like your company – but that doesn’t mean you should put all your money there. If the business goes through some hard times, your 401(k) portfolio could take a big hit if it is dominated by company stock. Furthermore, if you own some stock options, you’ve already got a sizable investment in your company. Consider diversifying your holdings among the various accounts within your 401(k), which contain a mixture of stocks, bonds and government securities.
  • When should you adjust your 401(k)’s investment mix? Over time, you may need to change the investment mix within your 401(k) to reflect changes in your life. To cite one example, as you move closer to retirement, you may want to lower your risk level and move some of your investment dollars into more conservative vehicles.
  • When should you start taking withdrawals? Your 401(k) is designed to help you save for retirement, so you’ll want to avoid taking taxable withdrawals (which may also trigger a 10% penalty if you’re under 59 1/2) too soon. You have great flexibility in how much to take out but you must start taking withdrawals once you reach 72. It’s essential you calculate an appropriate annual withdrawal rate, so that you don’t risk outliving your resources.

We can help you find the answers

As we’ve seen, your stock options and your retirement plan offer some attractive opportunities, along with plenty of questions. An Edward Jones financial advisor, backed by our teams of equity researchers and portfolio managers, can help you find the solutions that meet your investment needs. And with our other resources, we can help you complete your entire retirement planning picture. Contact us soon to get started.

Important Information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.