A Complete Guide to Strategic Wealth Building Using Company Stock

If you work in tech or another fast-growing field, you’ll find that salary is just one component of your compensation—sometimes a smaller piece than you would expect. The rest of your compensation often comes from company stock. Receiving stock as compensation comes in an alphabet soup big enough to make your head spin: RSUs (Restricted Stock Units), ESPP (Employee Stock Purchase Plans), ISOs (Incentive Stock Options), Employee Stock Ownership Plans (ESOPs), and so on. As if the acronyms aren’t hard enough to keep up with, the tax treatment can be even more complex.

As I have worked with families who have company stock compensation over the years, I’ve heard the challenges you face: How am I supposed to buy a house when stock makes up half of my income? I know my company stock shouldn’t make up my whole portfolio, but what else do I buy? How is this taxed? Am I even allowed to sell my stock?

While your employer and colleagues often tout the benefits of contributing to your 401(k) and enrolling in a Health Savings Account, a best-practice guide for company stock is practically nonexistent. When viewed as a tool, stock compensation can fast-track your financial goals. Here’s how I help my clients build their wealth using company stock.

Understanding the Risks of Overconcentration in Company Stock

When I first meet a family with company stock compensation, they commonly have an account where their shares have accumulated over the years. Maybe they sold a few along the way to buy a new car or take a vacation, but by and large they’ve done their best to let that money grow for retirement. Or, they’ve seen the number of shares in their account grow but haven’t known what to do with them, so inertia has led them to have more company stock than they feel comfortable with.

There are a few reasons why this gives me pause. The biggest of these is the reliance on one company not only to pay your bills now but also to grow your wealth for the next 20+ years and allow you to live comfortably in retirement. Investing primarily in one company leaves your retirement nest egg overexposed to company-specific risk. While we expect a diversified stock portfolio to go up and down unpredictably in the short term, having a concentrated stock position often leads to a bumpier rollercoaster ride than is necessary for limited (if any) benefit.

We are all familiar with the adage of “not putting all of your eggs in one basket,” and the same applies to your portfolio. Nobel-prize-winning economist Harry Markowitz put it best: “Diversification is the only free lunch in investing.”

Effective Strategies for Diversifying Your Investment Portfolio with Company Stock 

You’ve decided you want to invest in more than just your company stock. Now what?

The easiest place to start is often with your next upcoming tranche of shares. While each type of stock compensation is unique and has its own tax treatment, you can often avoid additional tax traps down the road by divesting from the shares as soon as you receive them.

Restricted Stock Units (RSUs) are the most common type of stock compensation I see. Here’s a question for you to ponder: If your employer gave you a $50,000 cash bonus, would you use that bonus to purchase shares of your company stock? This is effectively what RSUs are, though your company works the magic of turning cash into shares. RSUs are taxed the same way as a bonus when they vest, and there are no further tax implications if the shares are sold at vest. So, if you answered no to my question, you may consider selling new shares as they vest.

What about stock options, ESPP, or other RSUs that have vested in the past? Unfortunately, there is no blanket “right answer.” I recommend speaking with a wealth planner with expertise in these types of stock compensation. They can review your current holdings and partner with you to develop a tax-smart strategy for divestment.

Leverage Company Stock to Meet Your Financial Goals

With a divestment plan in place, you now must decide how to put these proceeds to work for you. This is the step of the process where you’ll need an idea of what you are trying to accomplish. Are you aiming to buy a house in the coming years? Do you have kids you plan to send to college? Do you want to set this money aside for retirement? Of your various goals, what takes priority, and what is “nice to have”? These are essential questions to ask when seeking long-term investment strategies with company stock.

I’ve met with families who can quickly pinpoint these answers, but I often find they can be moving targets. What may be a priority today could be a moot point next year. With the countless investment accounts and savings strategies out there, navigating what makes the most sense for you and your goals can be as challenging as remembering what ESOP stands for (bonus points if you remember without scrolling up). Additionally, the strategies you have at your disposal change depending on your income, tax situation, and employer benefits (have you heard of a mega backdoor Roth?).

Personally, I am diligent about taking our cats for their annual physical with our veterinarian. I value having an expert who knows us and is proactive about ensuring our cats’ health. And, when Luna is limping or Teddy isn’t acting his normal self, I trust our veterinarian to evaluate the situation and propose a path forward. I think of working with a financial planner similarly: your financial health will flourish from regular maintenance and having a partner to navigate big decisions with as they come along.

Navigating company stock options and planning for your financial future can seem daunting. But you don’t have to do it alone. Like the peace of mind I get from knowing my cats are thriving under expert care, partnering with a skilled financial planner can give you the same confidence about your financial health. Contact us today to start crafting a strategy that not only secures your future but also optimizes your current financial opportunities. We’re here to help you understand your options and make choices that align with your long-term goals. Let’s ensure your financial well-being is well managed and poised for growth.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be taken as such.