How to Invest Company Stock Windfall?

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Topic Author
smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

How to Invest Company Stock Windfall?

Post by smcdlux »

Hi All,

I've been lurking for a few weeks. This is my first post! :)

I listed my questions first (there are a lot), but I have completed the required form below.

Thanks in advance.

P.S. I'm sending this to my CPA/CFA. I just want to run it by you guys as well. This form has been very useful to fill out. It actually forced me to learn about our plans.

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QUESTIONS
----

0. Does the plan (listed at the end) make sense/seem reasonable?
1. Where is the best place to put my money from the sale of my stock? Once I sell, the money will sitting in a well known discount broker. Should I move it to a Vanguard taxed brokerage account? Can I move a portion of it to an IRA (given our income)?
2. If we pay down a portion of the principal on our mortgage, will it reduce our monthly payment, or just reduce the total number of monthly payments?
3. My wife and I are planning to have kids. Should I start saving for college now? If so, what is the best way to invest for a child that hasn't yet been born? Is taxed brokerage account the best way to go? It seems most other ways require the child to be born.
4. I don't believe that I can invest in a Roth IRA (given our income). Is this correct?
5. Is my math correct on the mortgage principal pay down in the plan below? All I need to do is pay the principal, and request for the bank to remove my mortgage insurance, correct? I believe this is law. Has anyone successfully done this?
6. Should I really just let my emergency fund sit in cash? Does it make more sense to keep 20k in cash, and 40k in money market?
7. Does it make sense to invest in REIT? I think real estate has taken a huge hit, so it makes sense to me to buy low. I also like diversifying a bit from stocks/bonds. In addition, I will keep it in a tax deferred account.
8. Instead of REIT, should I shift the 5% to bonds, and buy FID GNMA?
8. Am I allowed to roll my company plan into my Vanguard IRA even though I'm still contributing to my company 401k? Are there any caveats to this?
9. I am treating my wife's 403b plan like a 401k plan right now. Is there anything I should be aware of when doing this? They had a ton of annuity saleswomen lurking around the classrooms, but I advised my wife to sign up with Fidelity instead. Her Fidelity account appears to allow her to invest in mutual funds.
10. Should I consider a TIPs fund for a portion of my bonds?

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CURRENT STATUS
----

Emergency funds = 4 months (26,000)
Debt: $605,000 30 year fixed mortgage @ 4.875% (3200/mo + 450/mo mortgage insurance)
Tax Filing Status: Married filing jointly (no kids)
Tax Rate: 28% Federal 9.2% State State of Residence
Age: 25 to 30
Desired Asset allocation: 75% stock/20% bonds/5% REIT
Intl allocation: 20% of stocks
Pre-tax earnings: 175k to 225k
Total of all accounts: $476,125 (excluding emergency funds in Wells Fargo Savings)

== Wells Fargo Savings Account: 26,000 (emergency fund)

== Taxable Brokerage: 435,000 (91% of all non-emergency accounts)
91% XXXX

All of the money in this account is in a single (company) stock. Some of the shares are vested, and their value is 435,000 currently (I have more that have not yet vested). I can't yet sell any shares, but will be able to sell the vested shares "shortly". I am trying to avoid too much detail, as I don't want to expose who I am, but if you have more questions about this, please feel free to ask. All sales from this account will be taxed as regular income (I haven't exercised, or held any shares for > 1 year).

== Vanguard Rollover IRA: 14,228 (2.9% of all non-emergency accounts)
xx% fund name (ticker symbol) (expense ratio)
2.90% Vanguard Target Retirement 2040 (VFORX) (0.19%)

== Company 401k: 25,377 (5.3% of all non-emergency accounts)
I filled out a "profile" thing for this account a while ago, and it allocated my resources as follows:

Deleted

== Public School 403b: 1,520 (0.31% of all non-emergency accounts)
xx% fund name (ticker symbol) (expense ratio)
0.31% FID FREEDOM 2050 (FFFHX) (0.80%)
No company match

== Public School Pension

My wife is a teacher in California, and will be elligible for CalSTRS, assuming it doesn't change (hah). Based on the little calculator on the website (and hypotheticals), if she retires between 53 and 55, she will make between 2200 and 3600 per month. Obviously, the longer she stays (up to 60), the more she gets. Staying to 60 gets her 5500 per month.

These are really rough estimates.

For more details see the CalSTRS website.

Total of All Accounts Together (not each account individually) equals 100%

== Annual Contributions
$16,500 to 401k (excluding matching contributions)
$16,500 to 403b (no matching contributions)

Deleted

== Funds available in Public School 403(b)
Fund name (expense ratio)
FID 130/30 LG CAP (1.99%)
FID BLUE CHIP GR (0.94%)
FID BLUE CHIP VALUE (0.87%)
FID CAPITAL APPREC (0.88%)
FID CONTRAFUND (0.92%)
FID DISCIPLND EQTY (0.70%)
FID DIVIDEND GR (0.93%)
FID EQUITY INC II (0.69%)
FID EQUITY INC (0.69%)
FID EXPORT & MULTI (0.86%)
FID FIDELITY FUND (0.61%)
FID FIFTY (0.73%)
FID FOCUSED STOCK (1.11%)
FID FOUR IN ONE IDX (0.23%)
FID GROWTH & INC (0.75%)
FID GROWTH COMPANY (0.89%)
FID GROWTH DISC (0.76%)
FID INDEPENDENCE (0.92%)
FID LARGE CAP GROWTH (0.87%)
FID LARGE CAP STOCK (0.94%)
FID LARGE CAP VALUE (0.73%)
FID LC CORE ENH INDX (0.45%)
FID LC GRO ENH INDX (0.45%)
FID LC VAL ENH INDX (0.45%)
FID MAGELLAN (0.60%)
FID MEGA CAP STOCK (0.81%)
FID NASDAQ COMP INDX (0.58%)
FID OTC PORTFOLIO (1.06%)
FID STK SEL ALL CAP (0.87%)
FID TREND (0.83%)
FID VALUE DISCOV (0.96%)
SPTN 500 INDEX INV (0.10%)
SPTN TOT MKT IDX INV (0.10%)
FID GROWTH STRAT (0.78%)
FID LEVERGD CO STK (0.88%)
FID LOW PRICED STK (0.99%)
FID MID CAP ENH INDX (0.61%)
FID MID CAP GROWTH (0.79%)
FID MID CAP STOCK (0.61%)
FID MID CAP VALUE (0.91%)
FID NEW MILLEN (1.04%)
FID VALUE (0.64%)
SPTN EXT MKT IDX INV (0.10%)
FID SM CAP DISCOVERY (1.08%)
FID SM CAP ENH INDX (0.68%)
FID SMALL CAP GROWTH (1.08%)
FID SMALL CAP STOCK (1.13%)
FID SMALL CAP VALUE (1.18%)
FID STK SEL SM CAP (0.73%)
FID VALUE STRAT (0.81%)
FID CANADA (0.94%)
FID CHINA REGION (1.06%)
FID DIVERSIFD INTL (0.98%)
FID EMEA (1.46%)
FID EMERGING ASIA (0.78%)
FID EMERGING MKTS (1.14%)
FID EUROPE CAP APP (1.03%)
FID EUROPE (1.17%)
FID INTL CAP APPREC (1.09%)
FID INTL DISCOVERY (0.93%)
FID INTL ENH INDEX (0.63%)
FID INTL GROWTH (1.18%)
FID INTL SM CAP OPP (1.05%)
FID INTL SMALL CAP (1.23%)
FID INTL VALUE (1.03%)
FID JAPAN SMALL CO (1.05%)
FID JAPAN (0.84%)
FID LATIN AMERICA (1.00%)
FID NORDIC (0.99%)
FID OVERSEAS (0.70%)
FID PACIFIC BASIN (1.06%)
FID TOTAL INTL EQ (1.17%)
FID WORLDWIDE (1.15%)
SPTN INTL INDEX INV (0.20%)
FID INTL REAL ESTATE (1.12%)
FID REAL ESTATE INC (0.94%)
FID REAL ESTATE INVS (0.86%)
[..deleted a bunch of specialty sector funds..]
FID SEL GOLD (0.91%)
FID GLB COMDTY STK (1.09%)
FID STRAT DIV & INC (0.84%)
FID ASSET MGR 50% (0.69%)
FID CONVERTIBLE SEC (0.57%)
FID ASSET MGR 20% (0.57%)
FID ASSET MGR 30% (0.60%)
FID ASSET MGR 40% (0.61%)
FID ASSET MGR 60% (0.80%)
FID ASSET MGR 70% (0.76%)
FID ASSET MGR 85% (0.80%)
FID BALANCED (0.62%)
FID FREEDOM 2000 (0.47%)
FID FREEDOM 2005 (0.58%)
FID FREEDOM 2010 (0.62%)
FID FREEDOM 2015 (0.63%)
FID FREEDOM 2020 (0.69%)
FID FREEDOM 2025 (0.73%)
FID FREEDOM 2030 (0.75%)
FID FREEDOM 2035 (0.77%)
FID FREEDOM 2040 (0.78%)
FID FREEDOM 2045 (0.79%)
FID FREEDOM 2050 (0.80%)
FID FREEDOM INCOME (0.46%)
FID GLOBAL BALANCED (1.06%)
FID GLOBAL STRAT (1.13%)
FID PURITAN (0.60%)
FID STRAT REAL RET (0.72%)
FID CAPITAL & INCOME (0.76%)
FID CORPORATE BOND (0.46%)
FID FLOAT RT HI INC (0.73%)
FID FOCUSED HIGH INC (0.81%)
FID GNMA (0.45%)
FID HIGH INCOME (0.75%)
FID INFLAT PROT BOND (0.45%)
FID INST SH INT GOVT (0.45%)
FID INTERMED BOND (0.45%)
FID INTM GOVT INCOME (0.45%)
FID INVST GR BD (0.45%)
FID MORTGAGE SEC (0.45%)
FID NEW MARKETS INC (0.87%)
FID SHORT TERM BOND (0.45%)
FID STRATEGIC INCOME (0.71%)
FID TOTAL BOND (0.45%)
FID ULTRASHORT BOND (0.45%)
FIDELITY GOVT INCOME (0.45%)
SPTN INT TR IDX INV (0.20%)
SPTN LT TR IDX INV (0.10%)
SPTN ST TR IDX INV (0.20%)
SPTN US BOND IDX INV (0.31%)
FID CONSV INC BD (0.40%)
FID GLB HIGH INCOME (1.31%)
FID CASH RESRVE (0.37%)
FID GOVT MMKT (0.42%)
FID MONEY MARKET (0.42%)
FID RET GOVT MM (0.25%)
FID RETIRE MMKT (0.40%)
FID SEL MONEY MARKET (0.31%)
FID US GOVT RES (0.22%)
FID US TREA MM (0.42%)

----
PLAN
----

1. Pay down mortgage to eliminate mortgage insurance. I believe that this will cost $51,980 (605,000 - (709,000 * .78)).
2. Add $34,000 to my emergency fund to increase it to a total of $60,000 (10 months).
3. Invest remaining cash in a Vanguard taxable brokerage account.

If we assume that, after taxes, my currently vested shares net me $217,000, then I would be left with $131,000 after the principal pay-down and emergency fund increase. Adding that to my existing Vanguard IRA, 401k, and 403b, I would have a total 131 + 14 + 25 + 2 = $172,000 of investible cash (41k of which is in tax deferred accounts).

== Stock (75% of investible cash)
xx% $dollars [account] fund SYMBL (expense ratio)
20% $34,400 [Vanguard Taxable Account] Vanguard Small Cap Index Adm VSMAX (0.12%)
35% $60,200 [Vanguard Taxable Account] Vanguard Total Stock Mkt Idx Adm VTSAX (0.06%)
20% $34,400 [Vanguard Taxable Account] Vanguard Tax-Managed Intl Adm VTMGX (0.18%)

== Bond (20% of investible cash)
xx% $dollars [account] fund SYMBL (expense ratio)
3.10% $5,400 [Vanguard IRA Account] Vanguard Total Bond Market Index Inv VBMFX (0.22%)
14.5% $25,000 [Company 401k] PIMCO Total Return PTTAX (0.91%)
2.32% $4,000 [Company 403b] Spartan Intermediate Treasury Bond Index Fund - Investor Class FIBIX (0.20%)

== REIT (5% of investible cash)
xx% $dollars [account] fund SYMBL (expense ratio)
5% $8,600 [Vanguard IRA Account] Vanguard REIT Index Adm VGSIX (0.26%)

Total: 100% $172,000

Obviously, as soon as I strike this allocation, the accounts will begin changing. The major contributors to imbalance will be :

1. Sales of remaining unested company stock (vests monthly).
2. 401k/403b contributions, which will amount to 2750/month (excluding employer contribution) (16500*2/12)

Since my 401k and 403b contributions will always go into tax deferred accounts, I will continue purchasing the bond/REIT funds listed above, in matching proportions.

My company stock will go into my Vanguard taxable account, where I will continue purchasing the stock funds listed above. In the event that the Vanguard taxable account increases in value too quickly (do to company stock sale contributions), I will purchase Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX) (0.20%) in my vanguard taxable account to maintain a 75/25/5 mix.
Last edited by smcdlux on Thu Aug 25, 2011 7:19 pm, edited 2 times in total.
User avatar
Watty
Posts: 22124
Joined: Wed Oct 10, 2007 3:55 pm

Post by Watty »

Company stock if often the "exception to rule" for financial decisions so it is good that you are getting professional tax advice on how to handle that. If possible try not to do anything with the stock until you have gotten tax advice.

Paying down the mortgage to get out of PMI is an easy decision but your loan documents will determine the process and you will very probably have to pay for another appraisal.

Before you pay down the mortgage call your lender and ask them if they will "recast your mortgage". (Google this). Be sure to use this term when you talk to them. They are not required to do this but if they do they will recalculate your required mortgage payment after a large pre-payment so that the interest rate and length of the mortgage stay the same but the monthly payment decreases. For example if you have a $100K mortgage with a $600 a month mortgage payment and it is "recast" after a $33,333 payment, then your monthly payment would be decreased by a third to $400 a month. If they agree to this there may be a couple of hundred dollar processing fee. This is totally different than a loan modification, so if the lender starts using that term when you call correct them and insist on someone who knows what "recasting" a mortgage is.

If recasting the mortgage is not done then your fixed loan payment will stay the same and your 28 year loan will effectively be some be something like a 20 to 25 year loan. Since you will be paying for the appraisal to get out of PMI anyway it might be worthwhile to refinance to get a slightly lower interest rate or even go with a 15 year loan to get the lower interest rate. You could pay off even more if you wanted to keep your loan payment the same with the 15 year loan.

In a lot of ways a mortgage is very similar to a negative bond so someone with a 20% bond asset allocation and a $600K mortgage really is in a much different situation than someone e with a 20% bond asset allocation who rents or has a paid off house. You might take that into account when you determine what asset allocation you want.

About a third of all houses are owned without a mortgage so you would not be unusual if you decided to pay it off. You might want to consider a plan to get the mortgage paid off in a few years and that would save you tens of thousands of dollars in interest a year even after tax considerations.
nimo956
Posts: 818
Joined: Mon Feb 15, 2010 6:07 pm

Post by nimo956 »

I don't quite have enough time right now to answer all of your questions in full, but I just wanted to point out some of the better options in your 401k and 403(b).

401k:
NATIONWIDE BOND INDEX FUND - A - GBIAX (0.69%)
BLACKROCK INT'L INDEX INV - MDIIX (0.71%)
BLACKROCK S&P 500 INDEX - MASRX (0.31%)
BLACKROCK SMALL CAP INDEX - MDSKX (0.87%)
INVESCO STABLE VALUE - ISVGT

403(b):
SPTN TOT MKT IDX INV (0.10%)
SPTN INTL INDEX INV (0.20%)
SPTN INT TR IDX INV (0.20%)
SPTN LT TR IDX INV (0.10%)
SPTN ST TR IDX INV (0.20%)
SPTN US BOND IDX INV (0.31%)
50% VTI / 50% VXUS
Topic Author
smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

Hey guys,

Thanks for the in-depth replies!

nimo956, are you suggesting that I invest in those funds rather than bonds in my 401k and 403b? If so, to maintain my 20% bond allocation, I would have to hold bond funds in a taxable brokerage account. Is this worth it?

Watty, thanks! This is really helpful advice. It sounds like you're pushing toward paying down my mortgage, vs holding bonds. This actually makes a lot of sense, and is something that I had not considered.

Regarding the principal paydown, I received a letter from wells fargo earlier this year (my mortgage company) that seemed to imply that I had to hit 20% of my purchase price. Is this not true? You seem to imply that it's 20% of my appraisal price?
gerntz
Posts: 529
Joined: Fri May 06, 2011 3:37 pm

Post by gerntz »

Question: Is the company stock in a profit sharing retirement plan or is it stock options? Makes a difference tax-wise.
Topic Author
smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

Stock options. Vesting monthly. My strike price is very low (nearly 0). As a percent it's <1% of current price.
jbaron
Posts: 115
Joined: Fri Mar 18, 2011 3:32 pm

Post by jbaron »

Are they ISO options or non-qualified options? There are huge tax benefits, but some additional burdens and hurdles, if they are ISO options. You should talk to a tax accountant...

Jeff
Topic Author
smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

Nonqual
User avatar
FNK
Posts: 1360
Joined: Tue May 17, 2011 7:01 pm

Post by FNK »

What a shame. ;-) So the difference between strike price and market price at the time of exercise is regular compensation. Double check with your tax advisor, but it seems your best strategy is to exercise and sell straight away. Options are not part of your portfolio.

Do refinance into a 15-year mortgage.

Stuff bonds into tax advantaged accounts (FIDO spartan/PIMCO/Vanguard).

Dial risk down. You should not be less than 20% in bonds at 30 years of age.

Question whether you want REITs if you already have a house. Remember that REITs are not tax efficient.

Consider 50/50 us/intl equity.

TIPS are good, up to 50/50 vs. nominal.
User avatar
Watty
Posts: 22124
Joined: Wed Oct 10, 2007 3:55 pm

Post by Watty »

smcdlux wrote:Watty, thanks! This is really helpful advice. It sounds like you're pushing toward paying down my mortgage, vs holding bonds. This actually makes a lot of sense, and is something that I had not considered.

Regarding the principal paydown, I received a letter from wells fargo earlier this year (my mortgage company) that seemed to imply that I had to hit 20% of my purchase price. Is this not true? You seem to imply that it's 20% of my appraisal price?
Paying down the mortgage instead of holding bonds or even investing the money in stocks isn't a clear choice with one right or wrong answer. No matter how you slice and dice it though having a large loan so that you can have a large investment account is using leverage and involves risks. Even if it will work out well for you 90% of the time the other 10% of the time you could be in real trouble.

If you were in a slightly different situation and your questions was "I just inherited a paid off house that I will live in. Should I take a mortgage on the house so I can invest the money?" Then that would sound a lot riskier even though it is really about the same question as paying down the mortgage or investing the money. People often get hung up on trying to find the mathematically optimal solution and forget to ask the question "Do I really need to take the additional risk?" Without the need to take the additional risk I would be real tempted to reduce the mortgage to at least the level where you could comfortably make the payments on one income.

Personally in your situation I would even be tempted to do something like paying down the mortgage a lot and getting a 5 year ARM loan at 3% which I would pay off before the loan unlocks. Once you have the kids you could then comfortingly live on one income if you wanted and still have plenty of cash flow for the things like college savings that you mentioned.

Having a paid off house might also allow you to take a future job at another startup which might have great prospects but is risky and has not so great pay at first.

On the PMI it really depends on the details of your loan, your state laws, and even when the loan was made since the rules keep changing. The best thing to do is to call the lenders 800 number and ask them. If you don't like the answer you get be sure to research your loan documents to see what it says just in case they didn't give you the right answer.

While you are on the phone with them also ask them if they have a low or no cost refinancing program where the costs are reduced and not just rolled into the loan. Sometimes they have these but the catch will be that the interest rate will be higher than a full cost refinance. If you get lucky they might have a low cost refinance option that would allow you to get out of the PMI and get a slightly lower interest rate for little cost other than paying down the loan. Depending on how long you will be in the house it may or may not be better deal than paying for a full refinance.
User avatar
Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Post by Watty »

6. Should I really just let my emergency fund sit in cash? Does it make more sense to keep 20k in cash, and 40k in money market?
I just re-read your post.

iBonds are a good choice for of your emergency fund given your tax rate. The money will be locked up for a year and there is a penalty for cashing them before the fifth year so if you would still need other some other money in addition to these. If you search these boards for something like "ibond emergency fund" you should find several threads on this. If you still have them when your future kids go to college there are also tax advantages for this.
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archbish99
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Joined: Fri Jun 10, 2011 6:02 pm

Post by archbish99 »

Regarding saving for college with an unborn child, open a 529 with one of you as account holder and the other as beneficiary. When the child is born, there are no tax consequences to doing a change of beneficiary, because the new beneficiary is the child of the old beneficiary.
Topic Author
smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

Hey guys,

Your responses are really appreciated. The detail in these forums is astounding sometimes.

Re IBonds: yea, I was considering this, but I believe that you can only do 5k/year. In addition, it appears that the only way to purchase them is through treasury direct. I just wasn't too enthusiastic about it, but I'll poke around the forum, as you mentioned.

Re REITs: point taken. I'm already exposed on real-estate thanks to my house. Good point. :) I'll likely roll the 5% into my bonds, to make it 75/25.

Re sell straight away: yes, I'll probably do so. It will be regular income.

There seems to be a general undercurrent here suggesting that I should deal with my mortgage first. Either 15 year fixed, 5 year ARM, or pay down principal. If I put all of my cash (except for the 60K emergecy fund) into my principal, that would reduce my mortgage to roughly 422K.

With a 15 year 422K mortgage, I would owe 3016/mo, which is better than right now.

With a 5 year ARM, I don't think that I could swing this. Even if I put all of my cash toward it, I would still have a mortgage in the 250s. To pay this off over 5 years would be about 5k a month, which I can't afford. Am I missing something in this calculation?
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FNK
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Joined: Tue May 17, 2011 7:01 pm

Post by FNK »

You can get $5K in paper I bonds per SSN this year, and another $5K per SSN through Treasury Direct. Makes $20K for the two of you this year. A nice way to tuck away money in taxable space.

Same thing with EE bonds. They pay 3.5% if you commit to holding them for 20 years. Tax is paid when you redeem them. With both kinds of savings bonds be careful of taxes when you redeem them or when they mature. If you're still earning a lot 30 years from now, you'll pay top rate. Aim them at early retirement.

5/1 ARM adjusts at most 1 or 2% every year, so it can be profitable over 7 years if interest rates do go up, and over longer periods if rates stay low. But the spread between 5/1 and 15 fixed is so low it's not worth it. Fixed rate is insurance against interest rate increases.
Topic Author
smcdlux
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Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

One thing that's occurring to me as I think about principal paydown/refi/mortgage elimination is the lack of the interest rate writeoff. Last year I paid 30k in fully deductible interest on my mortgage. Deducting this dropped my tax rate from 25 to 17.69. If I move to eliminate or reduce my mortgage, it will affect this number (effectively giving me a salary cut of 30k).

Does this still make sense, or is it common to just ignore the interest writeoff?
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Watty
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Post by Watty »

Until you have talked to your tax advisor it is real unpredictable as to how your taxes will work out and just how much money you will have after taxes. I know very little about it but they might know of some way to use somthing like options(puts and calls, not employee stock options) to spread out the income to reduce the taxes.


With a 5 year ARM, I don't think that I could swing this. Even if I put all of my cash toward it, I would still have a mortgage in the 250s. To pay this off over 5 years would be about 5k a month, which I can't afford. Am I missing something in this calculation?

I didn't run the numbers but I just “eyeballed it” as if your paid your $605K mortgage down by $405K then had a 5 year ARM of $200K, over that 60 months that would only take about $3500 per month to pay off the $200K balance.

You were right that there is very little difference between the ARM and a 15 year rate, especially if you get the balance down to $200K
One thing that's occurring to me as I think about principal paydown/refi/mortgage elimination is the lack of the interest rate writeoff. Last year I paid 30k in fully deductible interest on my mortgage. Deducting this dropped my tax rate from 25 to 17.69. If I move to eliminate or reduce my mortgage, it will affect this number (effectively giving me a salary cut of 30k).

Does this still make sense, or is it common to just ignore the interest writeoff?
You need to account for it but if you eliminated the entire $30K in deductible interest then your taxes would go up a bit more than $10K because of your marginal tax rate, but you would have nearly $20K in the bank that is left over from the $30K saved.
Wagnerjb
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Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Post by Wagnerjb »

smcdlux wrote:Re sell straight away: yes, I'll probably do so. It will be regular income.
To be clear, the best strategy - once you have decided to exercise NQ stock options - is to sell the shares immediately and diversify.

That doesn't mean you should exercise your stock options the minute they vest. You shouldn't. They have time value, and early exercise destroys that time value. In your case, I realize that the value of your options is 100% of your net worth and that is a screaming signal to diversify. But with a salary of $190,000 per year at age 27, those options are not that valuable for you, compared to your long term net worth prospects. I would consider exercising a limited number of the options immediately upon vesting, but not all. This paper gives a good rule of thumb to consider, but keep in mind that your age and income are also important factors here too:

http://beta.parametricportfolio.com/wp- ... ptions.pdf

Best wishes.
Andy
Bfwolf
Posts: 2057
Joined: Thu Oct 14, 2010 11:19 am

Post by Bfwolf »

Welcome to the forum. You definitely are in a nice situation for a 27 year old!

In addition to the other advice, one watchout is the tax implications of exercising all those non-qual options at once. It will be counted as ordinary income, so you would pay much of it at the highest federal tax bracket of 35% (for income over $379,150 for married couples). Given you are in a 9% state tax bracket, I'm guessing that's a progressive tax as well. It might be worth considering whether you'd want to exercise half now and half on January 1st to pay less in taxes. Only you can judge whether that's worth carrying the risk of having so much net worth tied up in company stock for another 4 months.
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smcdlux
Posts: 7
Joined: Wed Aug 24, 2011 9:46 am

Post by smcdlux »

Hey Wagnerjb,

Thanks for the paper! Will read.

Hey Bwolf,

Yea, I was actually just trying to figure that out. My state tax will not change. My fed would go to 35%, though (a jump of 7%).

Waiting to Jan 1 will provide some benefit, though not a lot. The tradeoff is that the stock is volatile and may drop (which may be much more than the tax savings). I probably will have to make this decision after a bit of time passes, as it's too early to tell where the stock will be, what the volatility will look like, etc.
Bfwolf
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Joined: Thu Oct 14, 2010 11:19 am

Post by Bfwolf »

If you want to exercise a significant portion of your options, you will be in the 33% tax bracket at a bare minimum. The question becomes do you exercise in 2 pieces (now and on Jan 1) in order to have it all taxed at 33% vs. doing it all now and having half taxed at 33% and half at 35%. Only a 1% difference on average, and if the stock is volatile like you say, may not be worth waiting.
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