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Old 2nd August 2018, 12:19 PM   #1
Faydra
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Options vs. Restricted Stock Units

My company this year is offering us a choice between Stock Options and Restricted Stock Units.

We can get 100% Options, 100% RSU's or go 50-50.

I researched and watched videos and I think I understand that the RSU's are better because they can't go 'underwater' and they never expire.
However the options have the potential, should the stock do well, of bringing a lot more money at the end.

I am not sure of the tax implications of either route?

FYI: I am planning to retire in 5 years.

Any advice on which to take in my position?
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Old 2nd August 2018, 12:40 PM   #2
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Tax implications are about the same - the government is going to get its pound of flesh one way or another. Talk to a financial advisor if you want to explore the tax nuances of each option.

Beyond that, I think of such stock rewards as follows:

I'm not a professional stock market player. I wouldn't know where to even begin speculating on stock--even stock I'm getting from an employer I believe in. Speculation is its own profession, with a lot of inherent risk. My actual profession is something else entirely, and it's probably best if I stick to what I know. Therefore, I always choose RSUs, and always cash them out promptly.

The idea is to get the inherent value out of "stock jail" and into straight cash as quickly as possible. That way I realize the profit from the stock immediately, and can put the money to work for me in other forms. Again, you should consult a financial advisor about ways to put your money to work. This is especially important as you near retirement.
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Old 2nd August 2018, 01:17 PM   #3
blutoski
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Originally Posted by theprestige View Post
The idea is to get the inherent value out of "stock jail" and into straight cash as quickly as possible. That way I realize the profit from the stock immediately, and can put the money to work for me in other forms. Again, you should consult a financial advisor about ways to put your money to work. This is especially important as you near retirement.
The exception on this specific step is that sometimes an employee might want to hang onto the stocks in question, even though having the employer's stock concentrates risk and isn't in the spirit of diversification. Also, holding may reduce the tax exposure, or at least postpones a portion.

In my case, I work for a 100+ year old utility that's returning 5% dividend; it makes sense to hang onto my ESPP and occasionally offered options as part of my investment strategy.

So yeah, echo on above advice to consult with a reputable financial planner.
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Old 2nd August 2018, 01:20 PM   #4
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Compute the value of the options; any good investment advisor should be able to do that. There's a fairly complicated formula called Black-Scholes that comes up with a value based on the difference between the current stock price and the strike price, the time to expiration, and the volatility of the underlying stock.

Part of it also depends on your appetite for risk; as you are approaching retirement, you probably should be reducing risk, so the RSUs are probably a better fit.
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Old 2nd August 2018, 01:35 PM   #5
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Not enough detail here to tell. What are the details on the options vs the RSUs?
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Old 3rd August 2018, 09:26 AM   #6
Faydra
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Thanks everyone.. I do have an appointment with my financial advisor to talk about this stuff.
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Old 3rd August 2018, 09:47 AM   #7
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Originally Posted by blutoski View Post
In my case, I work for a 100+ year old utility that's returning 5% dividend; it makes sense to hang onto my ESPP and occasionally offered options as part of my investment strategy.

It was the utility sector's complete implosion (Boston's electric especially) that led to the 1929 stock market crash.

As long as it's only a part of a diversified portfolio, it's probably a fine idea.

As for tax implications - you pay on income. If the stock is worth X now, you can pay taxes on X. If they're worth X+5 later, you can pay taxes on x+5 later or, if you already paid on the x, you just pay on the +5. If you lose money, you can write those losses off against other gains, and even spread that loss over multiple years.

As always, find a financial advisor and an accountant you trust and then ... trust them.
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Old 4th August 2018, 11:58 AM   #8
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Originally Posted by Loss Leader View Post
It was the utility sector's complete implosion (Boston's electric especially) that led to the 1929 stock market crash.

As long as it's only a part of a diversified portfolio, it's probably a fine idea.
Absolute agreement. My intention was just to say that it's not always the right choice to sell immediately, and provide my own situation as an example. Sometimes holding employer shares fits into a diversification strategy. My employer's ESPP has a partial match, but only if I hold for 12mos, so I have to weigh that against the value of the lesser cash that might buy an alternative.

Personally, I favour one of Vanguard's equity index funds, and it makes up the larger proportion of my new purchases every two weeks. The options have come along maybe five times in 30 years, so they're not a big chunk of my portfolio and actually act to diversify in this case.



Originally Posted by Loss Leader View Post
As for tax implications - you pay on income. If the stock is worth X now, you can pay taxes on X. If they're worth X+5 later, you can pay taxes on x+5 later or, if you already paid on the x, you just pay on the +5. If you lose money, you can write those losses off against other gains, and even spread that loss over multiple years.
The tax implications will vary by region I expect. Here in Canada, the original grant is taxed as income (as a taxable benefit) and there's currently a 50% deduction. In contrast, the difference between the sale price and purchase price is taxed as capital gains, and that gets postponed if they're held.


Originally Posted by Loss Leader View Post
As always, find a financial advisor and an accountant you trust and then ... trust them.
An accountant, but probably also a financial or investment advisor. Depending on employer, some companies have this as a perk from their HR department, or if the employee is labour, some unions offer this as well.

It may just be a terminology thing, but my accountant - whom I trust to do my accounting - has nothing to do with my investment strategizing. She just does the books.
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