Stock Options and Restricted Stock

Advanced Planning for Equity Compensation and Tax Efficiency

For employees of publicly traded companies—particularly executives—stock options and restricted stock can represent a significant portion of overall net worth. While equity compensation can be a powerful wealth-building tool, it also introduces complex tax considerations, timing decisions, and concentration risk that must be managed carefully.

Without proper planning, exercising options or receiving vested stock can generate unexpected and substantial tax liabilities. As part of a comprehensive financial plan, we help clients coordinate equity compensation decisions with tax strategy, cash flow planning, investment diversification, and long-term goals.

Stock Options

Stock options give employees the right to purchase company stock at a predetermined price. There are two primary types of stock options, and the tax treatment differs significantly between them.

Incentive Stock Options (ISOs)

ISOs offer potentially favorable tax treatment—but only if specific rules are followed.

Key considerations:

• Options can be exercised and then held for at least one year (and two years from grant) to qualify for preferential tax treatment

• When holding requirements are met, gains may be taxed at long-term capital gains rates

• Exercising ISOs can trigger Alternative Minimum Tax (AMT), even if shares are not sold

• Poorly timed exercises can create tax liabilities without liquidity

ISOs require careful modeling to balance tax benefits against AMT exposure and market risk.

Non-Qualified Stock Options (NQSOs)

Non-qualified stock options do not receive special tax treatment.

Key considerations:

• When exercised, the spread between the exercise price and market price is taxed as ordinary income

• Exercising large amounts in a single year can push income into higher tax brackets

• Timing exercises over multiple years can help manage tax exposure

Because taxation occurs at exercise, NQSOs require a different planning approach than ISOs.

Expiration Dates and Exercise Timing

Stock options have expiration dates, and waiting too long to exercise can create problems.

Common risks include:

• Being forced to exercise a large number of options in one year

• Creating a spike in taxable income

• Losing options entirely if they expire unexercised

An intentional, multi-year exercise strategy often leads to better tax outcomes than waiting until the last minute.

AMT and Concentration Risk

Exercising options—especially ISOs—can trigger Alternative Minimum Tax (AMT). Without planning, employees may face large tax bills even if stock prices later decline.

Additionally, as company stock appreciates:

• Equity compensation can become a large portion of net worth

• Exposure to a single company increases concentration risk

• A downturn in the company’s stock can materially impact financial security

A thoughtful exercise and sale strategy helps balance tax efficiency with diversification.

Restricted Stock

Restricted stock is fundamentally different from stock options and can often be more valuable.

Unlike options:

• Restricted stock has value as long as the company’s stock has value

• There is no exercise price

• Vesting—rather than exercise—triggers taxation

Taxation of Restricted Stock

Restricted stock creates an automatic taxable event at vesting.

Key considerations:

• The fair market value of shares at vesting is taxed as ordinary income

• Taxes are owed whether shares are sold or not

• Large vesting events can significantly increase taxable income

• Planning must occur before vesting dates, not after

Because vesting schedules are known in advance, proactive planning is essential.

Planning Considerations for Corporate Insiders

For executives and other corporate insiders, managing stock options and restricted stock requires an even higher level of planning and coordination. In addition to tax and diversification considerations, insiders are often subject to trading restrictions that limit when they can exercise options or sell company stock.

These restrictions can include:

• Blackout periods

• Limited open trading windows

• Insider trading policies

• Ongoing access to material non-public information

As a result, insiders typically cannot transact freely throughout the year, which makes advance planning essential.

Limited Trading Windows and Timing Risk

Because insiders are usually restricted to specific trading windows:

• Opportunities to exercise options or sell vested stock may be infrequent

• Large vesting or expiration events may collide with closed trading windows

• Waiting until the last available window can force large transactions into a single tax year

• Tax exposure and concentration risk can increase quickly without a pre-defined plan

Using 10b5-1 Trading Plans

One of the most effective tools available to insiders is a Rule 10b5-1 trading plan.

A 10b5-1 plan allows an insider to:

• Establish written trading instructions during an open trading window

• Predefine the timing, amount, and pricing of future trades

• Execute transactions automatically at a later date—even during blackout periods

• Reduce the risk of insider trading violations

These plans can be used to:

• Systematically sell shares over time

• Exercise options on a scheduled basis

• Manage tax exposure across multiple years

• Reduce concentration risk in a disciplined manner

Integrating Equity Compensation Into a Financial Plan

Stock options and restricted stock should never be evaluated in isolation.

We help clients integrate equity compensation with:

• Tax planning

• Cash flow needs

• Investment allocation

• Retirement planning

• Risk management and diversification

When managed properly, equity compensation can significantly enhance long-term financial outcomes.

Our Role in Equity Compensation Planning

At Greenbush Financial Group, we help clients:

• Understand the rules governing their options and restricted stock

• Model tax implications across multiple years

• Optimize exercise and sale timing

• Evaluate concentration risk

• Coordinate equity decisions with broader financial goals

The objective is not just maximizing value—but doing so in a tax-efficient and risk-aware manner.

Contact Us . . . .

All of our services start with a complimentary consult. No high pressure sales tactics. We are financial planners, not salesmen.

About Our Firm:  Greenbush Financial Group is an independent registered investment advisory firm based in Albany, New York, that provides four main services to clients: fee-based financial planning services, investment management, employer-sponsored retirement plans, and retirement planning services.  The firm serves clients locally in the Albany region and virtually across the United States.

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