BiggerPockets Money Podcast - 379: Finance Friday: Stock-Based Compensation Explained and Tax Traps to Avoid

Episode Date: January 27, 2023

For the entry-level worker, employee stock options may seem completely foreign. But for most tech workers, this is commonplace and can be highly lucrative if understood correctly. In short, employee stock options, employee stock purchase plans (ESPPs), and restricted stock units (RSUs) all give an employee far more upside (and downside) than a traditional salary. As a result, you’re trading steady take-home pay for the potential to own company stock sharesthat could be valued at even more when you decide to sell. But is this gamble ever worth it? JT, long-time tech worker, has spent most of his life tinkering away as an engineer at some of the biggest companies in computing. He’s no stranger to the world of stock-based compensation and knows it can be worth the lack of salary if done correctly. In this episode, JT gives a complete overview of what stock-based compensation means, the three different types of stock you’ll be offered, and how this type of payout compares to a regular salary. He also goes in-depth on timing the sale of your stocks, the tax traps that could cost you thousands, and how to create a plan that lets you profit when getting paid in shares. If you ever foresee yourself working at a startup, tech company, or publicly-traded conglomerate, you MUST know what these types of compensation mean. Or, you’ll risk losing the real reward of a stock-based salary. In This Episode We Cover Stock-based compensation explained and why companies would rather pay shares than a salary ESPPs, RSUs, stock options, and the different ways you could get paid at a tech company When to sell your company shares and tax tips that can stop you from owning a big IRS bill Who is eligible to be paid in stock, and whether or not entry-level workers can get access The stock-payout schedule and when employees can expect to receive full compensation for years of company loyalty JT’s stock-selling strategy and whether he chooses to sell or hold on to company stock And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Scott's Instagram Mindy's Twitter Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Click here to check the full show notes: https://www.biggerpockets.com/blog/money-379 Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast, Finance Friday edition, where we talk to my friend J.T. About how he handles his tech company compensation. The three most common kinds of stock-based compensation you might see. One is the employee stock purchase plan. The most common form that you'll see is the restricted stock unit or the RSU. And then some kinds of companies for some kinds of employees will also offer an options package where those employees will get the option to purchase shares of stock at some particular price. Hello, hello, hello.

My name is Mindy Jensen. And with me, as always, is my RSU really smart and unique co-host, Scott Trench. Thank you, Mindy. That was a, I'll definitely exercise the option to be called really smart and unique. Good. Very just on the ball. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly be.

believe financial freedom is attainable for everyone, no matter when or where you're starting. That's right. Whether you want to retire early on travel the world, go on to make big-time investments in assets like real estate, start your own business, or participate in the success of your business through an employee stock purchase plan, option, or restricted stock units. We'll help you reach your financial goals and get money out of the way so that you can launch yourself towards your dreams. Scott, I think that this disclaimer is most important on this particular episode, the contents of this podcast or informational nature and are not legal or tax advice, and neither Scott nor I nor Bigger Pockets is engaged in

the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Also, JT is not telling you how you should handle your stock availability. He's just sharing how he handles his. Okay. Now, we are talking to my friend JT, who works at a large tech company and gets stock options, restricted stock units and the potential for cash as part of his compensation package, his overall compensation package. So we are talking to him today about specifically what those mean and how he handles his distributions. Before we start today's show, let's take a quick break.

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And we're back. We are starting a new segment today called Money Moments, where we give you our best tips, tricks, and money hacks so you can make the most of your financial journey. Here's today's tip. Did you know you can buy discounted gift cards for restaurants, spas, amusement parks, movie theaters, and travel, and if you live in Colorado, for skiing, at Sam's Club and Costco? Those gift cards are good for gifting as well as.

your own personal use and the usual discount is around 20%. For example, you can buy $100 worth of gift cards for California Pizza Kitchen for only $80. Instant 20% savings. Do you have a great tip? We'd love to hear it. You can share it with us by emailing MoneyMoment at BiggerPockets.com. Let us know if we can use your name so we can give credit where credit is due. Today we're chatting with my friend J.T. who works at a big tech company. JT is here to share how he handles his RSUs. Welcome to the Bigger Pockets Money podcast. I'm so excited to talk to you today.

Thanks, Mindy. I'm glad to be here. Before we start, let's get a little bit of backstory on you so our listeners understand where you're coming from. Sure thing. Well, I have always been interested in computers and technology. I was every bit the mid-nought-n 90s, you know, mid to late 90s, high school nerd that you could imagine from all the movies. And I was able to take that interest in computers and math and science,

get a bachelor's and a master's degree in computer engineering, and build that into a career developing and designing microprocessors. So I've worked for companies like Intel, AMD, Apple, Samsung, Amazon, Google. Some of those I've worked for, some of them I have. haven't, but those are the kind of companies that will really go and decide, hey, I need my own little computer chip to do something. And that's what I help work on. It's a pretty awesome job. That sounds like something I am never going to be competing with you for a job. Okay, let's get into your compensation. Let's talk about this whole concept of extra compensation, or both.

is compensation. Can you explain the framework surrounding stock-based compensation? Yeah, stock-based compensation is pretty common in some fields and less common in others. In my field in tech, you'll hear programmers, software developers, hardware developers, hardware designers will often have a pretty significant or even the majority of their final compensation be due to stock rather than due to salary. Different companies are going to handle this in different ways that are consistent with their culture, but it's very common in tech companies ranging from the smallest startup to the largest public companies to have a pretty meaningful part of their employees' compensation be in some kind of stock-based

scheme. The three most common kinds of stock-based compensation you might see, One is the employee stock purchase plan, which is not really a compensation. It's really more of a perk or a benefit you might have working in a company. And I think that's more broad across a variety of different kinds of companies and not just tech. When you really start getting into compensation packages, the most common form that you'll see is the restricted stock unit or the RSU. And then some kinds of companies for some kinds of employees will also, offer an options package where those employees will get the option to purchase shares of stock

at some particular price. All these things are kind of different. They all, and they differ a lot in the particulars. They all kind of follow the same general path as you go through your career. There's a point where the company says, okay, I'm going to make you a grant or give you an offer where if you meet a certain set of requirements, we will. will either sell you stock or grant you stock or possibly grant you an option. So that's the grant phase.

Over time, as the employee meets whatever those requirements might be, those areas of compensation will vest. Oftentimes they'll vest over a period of time, but some of these things will vest kind of all at once. And that is when the stock goes from not really under your control and not really yours. It's just a promise to actually being under your control. And you can sell it, you can vote with it, you can receive dividends because you own it. All the benefits of being a shareholder are now yours for those shares.

And then the last phase that's part of this compensation is at some point, maybe you'll want to sell that stock. And all three of these different forms of compensation have a lot of different rules when you sell around how is it taxed? How much are you taxed on? Does it matter when you sell versus when you got it? But that's going to be the third phase is when you decide, hey, I don't want this stock anymore. I either need the cash or I want to be in some different financial position than just having all this stock in one company. JT, are these different types of packages in your experience, are available typically with public companies, large public companies that are going to offer their employees this, or do you have any experience with folks who have gotten these types of interests in privately held companies or smaller businesses?

Yeah, so it depends on which package it is. Employee stock purchase plan, I think, is typically only available to larger companies that trade publicly. But when you start looking at a little bit restricted stock, and then definitely in the option space, those will be available more in smaller companies and startups. For a lot of tech employees who really like working at startups and really want to make that part of their career, oftentimes the salaries are going to be lower. And most of their upside for being, you know, working at that startup instead of a larger public company is going to be the options in that company that they receive as part of their compensation package.

And that, you know, that tradeoff is you end up in something more uncertain. Lots of startups fail and your options are going to be worth $0. But there's always the chance that, you know, you're working for the next Uber or the next stripe or the next, you know, big, giant, large tech company that when they decide to go public or sell to a private equity firm, whatever their exit is, you now get this huge payout that would have been practically impossible for you to see at a large public company if that's where you took your career. Awesome.

Let's get in definitions a little bit more deeply. Let's explore the difference between an employee stock purchase plan, restricted stock units, and then options. Sure thing. And we can frame it in terms of those three phases of the grant, the vest, and then the sale. So employee stock purchase plan is going to be the most common one. It's available across lots of different companies, across lots of different sectors. And the grant for that or the offer involved there is you as an employee will have an option to take some of your salary and put it

aside in some special escrow account for some period of time. And at the end of that period of time, the company will use that money to buy stock, oftentimes at a discount, and then you all have control over that stock. Different companies are going to do this in different ways with, you know, different times and different discounts. But a common grant might say, if you put in some percentage of your salary, it's usually up to maybe 15% of your salary from the beginning of April through the end of September, we'll purchase at the end of September. You'll get a 15% discount and you'll get that 15% discount on the lower of the price at the beginning of April or the price at the end of September. So my old company used to have this option. And the limit was

you could put up to $25,000 into the plan and buy all the stock at a 15% discount. I'm not sure if we had the same rules at the lowest price in that range. But you could also just sell the stock the very next day after it was bought. So you'd put all your money aside for the quarter in like a pool of maybe, I don't know, five, 10 grand, buy the stock, and then you'd immediately have 15% more value. Inside, just sell it and pay the short-term capital gains tax. I didn't want to invest in the company necessarily. I just wanted to take advantage of that perk. I would highly encourage anybody listening to explore their ESPP plan at work and consider doing something with that because it is a perk typically.

And depending on the rules of your plan, you may have the option to do what I was doing, for example. Yeah, there's a risk I could go down that one day. But I bit it for three or four quarters before I left. And every time made a nice 15% gain. Again, short-term capital gains tax apply for sure. But it's just a why wouldn't I take the few thousand extra dollars? Is that your opinion on those plans as well?

That's, yeah, that has been how I've approached those plans as well. Every company I've been at that has offered an employee stock purchase plan, I have taken advantage of that plan and done the same thing that you did. As soon as the purchase settled and came under my control, I would sell it immediately and take the difference between the amount that I got the stock for and the amount that it currently was and just take all of that as either income or. short-term capital gains, depending on what it had done in the two or three days between the purchase date and the settlement date. There is some risk there, though, right? Some companies are incredibly volatile, and you might have a really bad news event that happens the day that the sales there. And the stock does go down more than 15 percent in the three days or so before they purchase in it and you're able to sell it. But I think that's not super common. And like you, I haven't experienced that.

But it is there as an outside risk. Okay. Scott just said, quote, I didn't want to invest in that company. I just wanted the perk. And Scott's last company shall remain nameless, although if you listen to the show, you know which company it is. So it wasn't part of his plan to own stock in that specific company. does your opinion of the financial viability of the company have any influence over your decision, or would you handle your RSUs the same no matter what? So there's what I would theoretically do and kind of what I have actually done.

I think the, like everything else that you all talk about, right? The important thing I think is to have a plan and to decide ahead of time what it is that, that you want to do with that money. Yes. The main way that I like to think of it is, imagine I was walking down the street and I found $1,500 lying on the street or whatever, and I picked it up.

Would my first thought be, I'm going to go take this $1,500 and go buy my company's stock with this $1,500. I think for most people in the financial independence space, that's not what they would do. We've had, you know, beaten into us, and I think rightly so, that index funds are better than trying to pick individual stocks, that you're almost certainly going to do better, you know, picking a broad basket of stocks than than betting it all on one individual company.

But I see a lot of people that as soon as it's not cash, it's stock. And it's not, you know, it's stock in the place that they work and they want to, you know, they want to think that it does well. And they want to think that it's only going up from here. And I think they get maybe a little overly optimistic. and maybe they think they have more knowledge than they actually have over how their company is going to work. My opinion is if you actually do have that knowledge, you're under very, very careful watch from your company to make sure you don't violate insider trading laws. And if that's not you, you probably don't have as much knowledge about the upcoming financials of your company as you think you might.

So I think it's, you know, unless your plan is if I found $1,500 on the street, And I'd go turn around and put that right into my company stock that you should try not to be fooled by either the tax implications. And there are some really beneficial tax consequences to holding some of these things for a longer period of time, especially when you start looking into options. But don't let the tax tail wag the dog. And then try not to get overly exuberant about your opinion of what your company is going to do. Unless that's your plan. If you think, hey, I think there's upside here. I want to take a gamble.

This is no more or no less of a gamble than me betting on any other company in the stock market just because I work there. But I want to take a gamble and try to capture some upside that I think is there. I think that's fine. And I've done a little bit of that. But largely, I think most people are better served by selling and following their current investor plan for where my next dollar of money. goes to meet my, you know, my financial goals. Okay. When it comes to selling this stock at a

discount, Scott, you sold it the next day. Can you make a game time decision or do you have to initiate the sale in advance and just hope it doesn't go down between the time that you set, you initiate and that actually sells? I can actually take, for my situation, because I was on the finance team and we prepared the financials for that. I had to set up a such system with the HR group in advance that said, I'm not going to, I'm not trading on any insider knowledge. I'm just setting up my plan to set it to buy the maximum amount of this of this stock and then sell it the next day ahead of time.

I clearly don't have knowledge about what's going to be true three months or six months or nine months down the road. I'm just setting up that as the parameters of my plan way in advance. And there's no way my knowledge of the business could or could not impact that. It's just I'm just taking advantage of the perk and harvesting a 15% spread. And I have never been in that position or I have actually known more about the financials of the company than you could read from any of their publicly facing documents. So for me, as soon as that stock settled, I could sell it as though it were any other stock

in a brokerage account that I had. For many companies, some companies will impose a blackout period. where no employee is allowed to trade that company stock. And usually it'll be, you know, sometime from several weeks or maybe a month before the end of the quarter until when they announce results so that they can just be sure that everything is public information. And I've had to, you know, sign agreement saying I'll abide by these blackout periods as part of my employment contracts for some of the companies that I've worked for. Okay. So how frequently does one receive stock-based compensation? That's another one of those things that varies pretty broadly from one company to another.

The companies that I've worked for, there are typically three events as part of your career where you may be granted some form of stock. A common one is when you sign on to the company. So the company might say, hey, we want you to come work for us. Here's the position that you're going to have. Here's what your salary is going to be. And then we're also going to make a stock grant for you of restricted stock or maybe options or maybe you get to choose what you would like to have that compensation take the form of. Oftentimes, the sign-on grant will have a very specific vesting schedule. investing, again, is when the shares become available for you to have control over and do what you want with them.

A very common investing schedule will be to say you don't get any stock for the first year. At the end of your first year being employed at this company will give you 25% of the shares represented in this grant. And then over the next three years, every quarter you'll get an additional one-16th of that grant. So that vesting schedule is kind of known in the industry as a four-year grant with a one-year cliff that will vest quarterly. So you get nothing for a while, you get this big chunk of a year, which is always really exciting. And then you get bits and pieces of it through the remainder of that grant. The other times you might see additional grants are if you're promoted, sometimes that will come with a grant as well. you'll get some salary increase as part of that promotion

and then an additional grant that may have the same vesting schedule as your sign-on grant. Less frequently, you'll see the cliff, because if you've been promoted, they already know that you're doing good work, and they don't need to try to keep you there for a year to make sure everything's going to work out. So it might just be you'll get 1 16th every quarter

or 1 8th every six months, or however it is, they decide to do their vesting schedule. And then some companies will also do additional grants as part of their semi-annual or annual performance reviews. So when I go through and talk to my boss, I might get some amount of a salary raise and then a follow-on grant. Sometimes it's called a refresher grant as well. And that just sort of keeps, you know, that that flow of restricted stock kind of coming

to me as I work through the company. Different companies will work differently. I've worked at companies that'll do a sign-on grant, and then that's really kind of all the stock that you see. I'm aware of companies that instead of doing these refresher grants every year, they might give you a grant when you sign on and say, well, this stock will vest over two years or three years or four years. And you don't see anything until that two or three or four years is up, and then they'll make another grant based on your performance and how the company's doing. And, you know, all those other factors. So they do tend to work a little bit differently, but this, you know, sign-on bonus with annual refresher, I think is pretty common, especially in the tech industry.

It sounds like when you are negotiating your employment compensation or presented with it, you need to read the fine print, read it all the way through instead of just listening to what HR says, oh, we're going to do this, like read all of these documents specifically so you understand exactly what's going on. Oh, 100%. Yeah. It's very important for RSUs and then when you start getting into options, options, especially at smaller companies, you really need to have a good understanding about how your company's specific program is going to work and what the risks are for you, what the tax implications are for you, and what the potential upside is for you as well.

Another point on that is oftentimes the stock-based compensation is one of the more negotiable parts of your sign-on compensation package. And depending on the company, you may be able to bias your compensation either towards salary. You might say, hey, I'll take an – I would like an additional $10,000 a year in salary, but you can take $80,000 off my grant. Or you might say, hey, I'm willing to take a smaller salary, but I want a larger amount of this stock-based compensation,

just depending. Some companies will allow that. Some companies have less flexibility there, but it will allow you to bias your compensation to fit sort of your preferred risk profile for your career. Yeah, I think that to highlight what you're saying here, this is an investment decision in a lot of cases for a lot of folks, right, to bias your compensation one way or the other, right? I am an aggressive personal finance, you know, nerd with all this

stuff, and I like to make probability weighted things. So, you know, I, first of all, I would want to think that I would try to join a company that had good growth prospects. That's the gamble part of it, but that's something I would try to research very, very heavily with that. And then I would probably want to bias if I were able to do that, and I thought the company was fairly valued more towards the option upside and less towards the cash compensation today. But that's a tradeoff that I think a few people understand very well. So for example, you know, if you had a choice at a public company that had a higher salary with a fair but not glamorous option pool and a startup that just raised money at a crazy valuation, the startup's

going to give out equity like candy, right? Because they just got this incredible valuation from a venture capital firm. Their equity is, you know, they don't have the revenue to support it at this point in time, all that kind of stuff. And that's something to just be aware of, right? They're going to try to pay you less. That's going to reduce their expense profile on their income statement and make make things look good. And you've got a spin, but maybe not a very high probability one compared to a more stable company that's producing large amounts of cash flow. They might give you less equity, but there might be more of a, like a clear trajectory towards growth and track record as success. And I think that folks don't really think that through all the time when they're making

these decisions. Would you say that that's been true with any of your peer set or folks you've known in the past? Yeah, most of my career has been in larger companies. So I don't have a lot of experience in that sort of startup options package. But it is, you don't have to go far to hear stories where even good bets with startups end up being being very problematic for individual employees. And I would certainly encourage anyone who's looking at working at a startup and intrigued by the allure of possibly owning, you know, 0.2% of the next, you know, stripe or DoorDash or whatever, to really understand the risks that you're taking.

even assuming that the company does well. So you should certainly talk to a professional around it, but when you're really at that part of a company, you take on dilution risk. If the company takes on additional investors, your amount of the company that you own may be less than you think. You take on a lot of tax kind of risk, largely due to the, you know, a lot of times you'll get these options for this private company

that there's no market for. So you still have to deal with the tax implications of potentially, you know, millions of dollars of value, but you can't sell your shares afterwards. And like I said, you don't have to go far to read stories of people who have gotten into the startup, even a startup that goes well, and they just can't do anything with their stock-based compensation because of the circumstances of their life. So it's really important to have a good understanding of, you know, what happens with these plans and your circumstances, especially for some of these smaller startups. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're

like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your taxed refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just trying to

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In communities across Canada, hourly Amazon employees earn an average of over $24. 50 cents an hour. Employees also have the opportunity to grow their skills and their paycheck by enrolling in free skills training programs for in-demand fields like software development and information technology. Learn more at aboutamazon.ca. JT., is this a world that is accessible to folks that are at the entry or junior level in businesses? Or are we really talking about something that is is more for the much more senior seasoned engineer, product and technology type worker, executives, those types of things.

Yeah, that's a good question. It is going to depend again largely on the company. I would say most tech companies will have some element of stock-based compensation across their job grades. So if you bring in someone who's just out of school, some percentage of their compensation will be from these stock-based plans rather than just salary. The higher up you go in the company, usually the larger the impact that stock-based compensation is going to be as part of your overall compensation. You hear occasionally something in the news about how, oh, CEO of some company or another agreed to reduce their salary to

a dollar for just things that are going on in the business. And they neglect to mention that that particular senior employee has, you know, $15 million worth of options that are vesting this year that they could take advantage of if they wanted to, right? But generally and, you know, across a lot of tech companies, for all job grade, stock-based compensation is a pretty common form of compensation. So restricted stock is definitely less common than the employee stock purchase plan. It is part of your compensation instead of just being something that you can take advantage of. Again, you can sort of split it up into the grant, the vest, and the sale.

For the grant, your company will usually say, hey, if you continue to be employed, then at some vesting schedule will grant you control over some amount of stock. And it's oftentimes presented either as a cash amount. They might say, we'll grant you $10,000 worth of shares. And then at some point, the board of directors will approve that grant across all the employees that might fit under that grant. And at that time, that $10,000 will be converted to shares. and it'll stay as shares through the rest of the vesting period.

So if you had $10,000 and your stock price was $10 when the board approved the grant, they grant you 100 shares, and that would be what you would vest on. As you go through your employment period, when you meet that vesting schedule, you just get those shares. And those shares are now under your control. They're just as though you had purchased them off of the market. And when they vest, that's counted to you as income at their current value. So if you had a hundred shares that were vesting, and even though if it grant, your stock

may have been $10 a share, if now it's $20 a share at that $100 shares, you'll owe, it'll count as $2,000 of income and be taxed as income when it vests. then from that period, it's as though you bought it at $20, and all the regular short-term and long-term capital gains are going to apply. But you'll pay the taxes at vesting time, and it'll come out as income and be taxed as income at the value it is when it vests. That I think is important to note that you are paying income-level taxes, not long-term capital gains taxes on this. And I guess short-term capital gains are basically the same as your income level, right? So it wouldn't matter if you were getting the options and then instantly selling it.

That's the same thing. That's right. Yeah. So if you were to get restricted stock and then sell it immediately, assuming the stock was flat, there's probably going to be a little bit of movement. You know, any change in the stock price between when you vested and when you sold would be, you know, a short-term gain or a short-term loss. And then the value of the value of the stock price. You know, the stock when invested is counted as income to you. One trap people can kind of get caught in here is the withholding rate for restricted stock is not the same as the withholding rate for your income. And especially if you are a high income earner, you might find at the end of the year that you haven't withheld enough taxes and that you owe more. So that's a pretty common place,

especially for either high-income earners who are in some of the higher tax brackets or individuals who have a significant portion of their compensation being stock-based compensation because just the withholding is all different. And as far as I know, there's no way to elect to withhold more to actually meet your tax withholding requirements. You just either end up needing to pay estimated taxes or make it up at the end of the filing season. So if you become, come into money and have a big success like this or really in any other format and get a and are able to put a large amount of cash in your bank account. So there's something that's other than payroll from your company. It's probably a good idea to hire tax counsel and to be very

conservative with that money until you have filed your taxes completely and feel like you understand that because these types of traps can happen in a lot of different ways. if you're used to an employer withholding and handling your taxes more or less entirely for you throughout the year and get a big refund. And there are taxes withheld for restricted stock. You'll typically have an option to either pre-fund your account with your custodian with money to pay taxes or they'll sell whatever percentage of shares is required to meet the withholding requirements. But you just need to be careful for some tax brackets.

withholding rate on RSU is going to be higher than what your final tax rate is going to be. And for other higher income earners, it's going to be lower. So it's just something you need to pay attention to. So while you may not know of any way to change the withholding for the RSUs, you can change the withholding in your paycheck if you don't want to pay the IRS on April 15th to any extra. that you owe. On episode 360 with Natalie Colletti, she, Kalati, she shared that now is a really great time to sit down with your tax pro to get some tax planning, to do some tax planning for the year in advance. If you know that this is part of your tax compensation, or your employee compensation, and you are going to be hit with a surprise bill this year, which many people are,

changes to the tax law, yada, yada, maybe now is a really good time to sit down with your tax pro and say, hey, what can we do going forward so that I don't have this on April 15th? I personally don't love writing a big check to the IRS, but I would much rather write a check to the IRS than have them send me a check because that means I have given them a free loan for the whole year, and I don't like that. But I digress. Well, the IRS is going to charge charge you interest if you're if you're if you're if you owe them too much so you know you want to be careful about that too because yeah I don't like paying the IRS uh more interest than the spread of my my my savings account for example yes and I'm self-employed as a real estate agent so I have to

pay quarterly taxes anyway um so my specific situation is different but yes uh I I always was fine writing them a check on April 15th JT what is your specific strategy with how do you personally handle all of this given the wealth information you shared with us today? So for my restricted stock and for my employee stock purchase plan options or shares, those are ones I'll sell basically immediately. I, you know, my position is, like I said before, if I were walking down the road and found some money on there, I would not go buy, you know, stock in my company. And when I looked at the value of that restricted stock, it seemed a better position for me to go turn it into VTI or VTSAX or whatever the rest of my allocation plan looked like.

There have been times, you know, so I've been at my company for a number of years now. And there have been periods of time where that was a very unfortunate financial decision. And had I held onto the company stock and sold it later, it would have been a meaningful difference in our financial position to the tune of several hundreds of thousands of dollars. There have been other times at the same company where I have been very glad that I have sold my restricted stock immediately because the current price is down. down quite a bit from some of the levels in which I sold. And I've just learned for me, like I can ignore my index funds for months or years at a time, and it's fine. But you give me like one share of company stock and I'm looking at it every day.

Is it up today? It's down today? Has it been up for the week? Has it been down for the week? So I clearly don't have the temperament for individual stock investing. but if I go put it in an index fund, I'm happy to leave it alone and let it grow, and it doesn't freak me out whether it's up a little or down a little or up a lot or down a lot. It just does its thing. Okay, I love that. You have a plan. And just like paying extra

on your mortgage, even when it's a 3% mortgage rate versus not paying extra on your mortgage, it gives you the hebi-jeebies to have this stock in your portfolio. You don't want to be an individual stock portfolio or an individual stock investor. So what that tells me is you've thought about it. I think that's the most important takeaway of this entire episode is that you need to think about what you are doing with your investing strategy. What is the episode that we just did an episode about coming up with an investment plan and that was episode 362.

come up with an investment plan and follow it. And I don't want to say, it doesn't matter what you do. As long as you have a plan, it kind of matters what you do. But most important is that you think about it. You hear about these people who are losing everything in crypto or losing everything in meme stocks. It's because they're getting in at the end. Oh, everybody's talking about it.

It must be good. That's not true, necessarily. Just because everybody's talking about it doesn't make it good. It just means everybody's talking about it. Okay, so given that you work for a tech company and tech stocks are down, is there any threshold that you would not immediately sell? So there are, and we could also, I guess, talk a little bit about options if we want to talk about options. This is specifically for RSUs, which are, those are granted to you, right? Those are given to you.

So you've paid zero dollars for it. So even if it was worth a penny when you sold it, you've still made money on it. Yeah. And I think every RSU grant I've gotten, or every RSU I've had that's vested, I'll sell within, you know, a couple weeks to exit that position and funnel that money into the rest of our financial plan. So RSUs you'll instantly sell. you have RSU's cash and options.

Have you ever taken the cash? No. And that's so different, you know, I said different companies will work differently in their performance reviews. My current company, oftentimes when they do the performance, you know, the merit compensation for this longer term stuff, will have a choice between whether we wish to take that amount in cash that still vests, right? the vesting is effectively the same.

But they'll say, hey, we're going to give you $10,000 of compensation. You can have $10,000 of cash that vests over three or four years or whatever. You can get $10,000 worth of restricted stock, or you could get that $10,000 in options. And then, you know, at this company, we get to elect which one of those things we want that whole award to be given to us in. And is there any threshold that you would not sell? Like obviously, if you take the option, you have the option to buy X number of stock at this price. So if the stock, let's say it's $50. If the stock is currently trading at $35, it doesn't make sense to buy it at 50 and sell it at 35.

Unless you need losses, but that doesn't, I don't know. I don't like losses. No, I don't do that. What they're doing is they're giving you. So let me ask you this from a psychological statement. standpoint, you know, when I was doing the ESP, so my colleagues didn't do it. And I was kind of baffled by it. Like, why wouldn't you do this? And there's a, I think, a psychological element of, no, this is a test for my employer. And you could wonder if, in your situation, if the employer,

if employees might be thinking, this is a test. The options, if I take the option option option, then that means that I think that the company is going to blow up and do great over the next couple years. The RSUs, because I just own the stock, are a more middling option. They don't have to, even if they go down, there's still me worth something. So I have some value there. And then the cash is the most conservative. Do you think there's any element of that to be, to be factored in, or is that all in people's heads? I think largely that's in people's heads. The way that I look at it is it gives you an opportunity to sort of shape the risk profile of your compensation. You can really like the company that you work for and think that it's going

to do really well and not want to own its stock. You can really not like your job, right, and think your company is terrible, but on the off chance that, you know, it has a really great year and the stock price quadruples and value, you want to be open to that upside. So I think it's, you know, that election really says more about, you know, the way you you want to shape your compensation and the amount of risk you want to take as part of your career and your salary, right, more than, you know, it, that you think there's some, you know, some director or C-level executive who's like looking at a spreadsheet of everybody who took, you know, cash instead of options and are like, hmm, I don't, I don't know about that, you know, that one.

Clearly they don't, you know, they're not invested in the company. Okay. And then last question I'd have is around tax. taxes. I'll use my example, right? I had an employee stock purchase program. If I put 10,000 of my salary into it, I could buy $1,150 worth of stock, right, a 15% discount. Then I turn around and sell it, that $1,150, not only am I getting taxed to my salary, of course, but I'm also getting taxed on the short-term capital gain, the one-day capital gain of that spread between $1,11.50. could have left that money in the stock for one year in order to avoid, you know, convert that from a short-term capital gain to long-term capital gains tax.

At that point, it didn't matter very much because my tax bracket was very low and they're very comparable. But for some folks, that might make a big difference. How would you propose approaching that problem? It sounds like you sell, you know, sell immediately for a lot of this stuff. But are there circumstances, can we tweak those circumstances? in such a way where you would begin playing the tax game. Sure.

And I think the place that you do that is with options. So the nice thing, the simple thing about restricted stock is when you vest, that's all income. Can't do anything about it. You have, you know, number of shares times value of shares, amount of income that is attributed to you and you owe taxes on it right away. And that's your cost basis for the stock. So, yeah, the stock may go.

you know, up a little bit or down a little bit between when you vest and when you're able to sell, but there's not really a lot you can do from a tax perspective at that point. The employee stock purchase plan, like you mentioned, there are some real tax consequences to holding for either one year or it gets even a little better at two years, especially if you have that look back, period. So if you have the look back, you could say, you know, my stock, you know, the value of the stock at the beginning was 100, and now it's 150, and I still pay 85. So when you sell, the 85 to 100 is always income. That 15% discount is always, always income. Depending on when you sell, the 100 to 150 may be income, it may be long-term capital gains.

And I think it's usually you have had to have held the stock for a year, and it has to have been two years past the grant date. Wow. So I made the right decision, but out of ignorance, not out of smarts. Well, and I think you mentioned your plan didn't have this look-back provision in it anyway, which is really where this extra piece comes in. For employee stock purchase plan for most people, I think I take the same perspective you do and that the values just really aren't large enough to make enough of a difference in your

financial position to really worry about or to justify the risk of holding onto that stock for 12 to 18 months given whatever volatility might be in the stock. Different people are going to calculate that risk differently, but I don't think the extra taxes on that, you know, that $50 per share warrants holding onto that stock for two years. Options are going to be a somewhat different story because they can be worth a lot more. And there's a kind of option that has a similar kind of tax behavior as the employee stock purchase plan. And those are the incentive stock options. And those will allow you to say, okay, I'm going to exercise this stock.

There's a difference. So they could say, hey, JT, we're going to give you a bunch of options at $1, which is great. You know, you have the option to buy a stock at your company's stock for a dollar. If the stock price is $10 when you exercise those shares, then it all starts becoming interesting. What do you do with that extra $9? For some kinds of options, it's the same thing. That's income. And it's income right away.

And you need to account for taxes on that income. For these incentive stock options, it's not necessarily income depending on when you sell. So if you hold the stock for a year after you exercise and two years after the grant, that $9 is long-term capital gains. And if the company has gone up enough and the amount of the number of shares that you have is enough. Now you're not necessarily looking at, you know, 10% of, you know, $500 or whatever. You're potentially looking at, you know, a top bracket earner in the state of

California, right? This is potentially hundreds of thousands of dollars for holding the stock for a year versus selling it immediately. And again, that's going to be an individual decision. Do you think it's worth taking the risk of holding on to that stock for the year until you're able to sell it? Or do you not want that risk? You're willing to pay the taxes and you're willing to sell and go into whatever else your financial plan has for those extra dollars. But it can end up being real, real money depending on what the company's stock price has done. and when you decide to exercise. JT, this has been fascinating. Thank you for coming on in the show and discussing this topic with us. I think that, you know, it's some folks, hopefully many of our

listeners, have the opportunity to participate in plans like what we discussed today. And when you do, please refer back to this episode and know that there are options for your options and decisions to make that could have major impacts in your life. JT, where can people find out more about you and the financial planning and tax strategy firm that you'll be starting soon. Yeah. I think I'll stick with microprocessor design. Now, probably the best way to get a hold of me if you really want to is in your Facebook group.

I'm active there. I'll pop in ahead of time. If you want to tag me on there, you know, I'm happy to talk about all this stuff or hear disagreements as to why my approach is not the best one to take. So respectful disagreements. I don't think you'll get to many of those. But you can find that group at Facebook.com slash group slash BP money.

Thank you for being a part of the group, JT. And thank you for listening. And thank you for sharing your wisdom on this pretty complex topic today. Yeah, thanks. I had a great time. I like thinking about this stuff. So it's fun to talk about it. Thank you, J.T.

And I'll talk to you soon. And that was J.T. A big tech employee talking about his compensation package, stock compensation packages in general. and how he handles his particular compensation package. Scott, what did you think of JT? JT is super knowledgeable, is clearly given us a ton of thought, has experience across multiple different companies, although mostly public companies, as he acknowledged, and has really kind of thought this through, and I think in a way that that probably has benefited himself, and I suspect

many of his close colleagues that have benefited from his wisdom over the years. And I'm sure he's done very well and chosen the companies that he works for wisely as well, to the point where they probably have produced very well inside of these plans. Yeah, I think that what is most important to take away from this show is that he has a plan in place. He has given it thought. He has decided that he wants his investment portfolio to look like this, to be comprised of these systems and these portions and these investment vehicles. So that's what he's doing. He's not going off on tangents. He's not venturing down this path to try this out, try that out, try that out. He has a plan and he's sticking to it. And I think that's really important.

You don't have to sell your company stock instantly if you don't want to. If like he said, you found $1,500 on the street and you would go use that money to buy your company stock anyway, then getting the and holding onto that stock is great. That's a great plan. But that's the key word here. It's plan. He has a plan in place, and he's executing his plan. And I think that's really great.

Yeah. I also think that, you know, towards the end, we heard this framework, and it was, well, if I had invested in my hot shot tech company, I probably would be up a few hundred grand over my index fund strategy. Yet, he is also happy with that outcome or can live with it because that's, he's not thinking in terms of outcomes. He's thinking in terms of bets, probability-based thinking, thinking in bets with Annie Duke is a great book, for example, to understand this. He says, my portfolio, my plan is this, and I'm happy to live with it, even though I actually would have done better if I had dumped it all in my company stock. That's a really wise position to take, in my opinion, and something that I think

is hard for a lot of people. They want, I think it would be really hard to miss out on company growth like that, but I think I respect and his approach and it would be likely to take the same steps he's taking in his position. His company could very well have gone the route of Enron or WorldCom, where he got the grants, held onto them, and then lost everything. Just because his company went up doesn't mean that it's always going to go up. He works at a big tech company. Right now, the stock is down.

But that doesn't mean that it's always going to be down. It's just, like you said, it was a gamble. Like he said, it was a gamble. He was gambling on the stock being different than it ended up being. And that's okay. He took an educated gamble guess and it didn't work out. He's still doing well. It's not like he lost everything.

He just didn't see some of the explosive growth that other people did. But he also said, I don't have any issue with what's going on with my index funds. Those are said it and forget it. in his mind, he can put money into the index fund and leave it. In his mind, if he owns even one share of his company stock, he is constantly thinking about it. And that is not worth the mental real estate that it takes up to him. So he has foregone that in an educated way. And I think that's the right maneuver is just have a plan and stick to it as much as you can. I agree completely. Well, you have to because he's right. Okay, that wraps up this episode of the Bigger Pockets

Money podcast. He is Scott Trench and I am Mindy Jensen saying, chow, chow, brown cow. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at YouTube.com slash Bigger Pockets Money. Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kaelan Bennett, editing by Exodus media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.