For corporate executives, taking the next step toward retirement means managing your earnings in the most tax-efficient way possible.
As a corporate executive, you know all too well the demands on your time, the importance of decisions you have to make, and the stewardship required to keep your company thriving. It’s a demanding job, and managing that level of wealth takes a certain level of skill and attention, as well as a lot of planning. And the time to start is years before you hand the reins to your successor.
As you and your family plan for what’s next – whether that is retirement or something else – be sure to consider how to manage your stock options, deferred compensation and other pay issues in the most tax-efficient way possible.
Ask for an accounting of your total benefits and compensation.
You’ll want to know the rules around exercising stock options, vesting schedules and policies about how to draw deferred compensation. Understanding these policies will help you avoid equity concentration down the line as well.
*Tip: *Pay close attention to the vesting rules. Your window to exercise vested stock options may accelerate upon retirement, and unvested restricted stock and performance shares may be forfeited when you are no longer an employee. If you have unvested awards, consider including them when negotiating your retirement package.
Work with your advisor to determine your cash-flow needs in the first years of retirement.
In your calculations, be sure to include your tax liability when exercising stock options, as well as what you’ll need to fund health coverage and other insurance needs.
Consider if you can delay lump-sum payments until you’re no longer drawing a salary.
When you retire, you’ll likely be at your maximum earnings, and adding lump-sum payments from your nonqualified deferred compensation plan and accumulated stock awards could significantly boost your adjusted gross income as well as your tax obligations. You may be given the choice to take a lump-sum payout in the near term or push payments out five to 10 years, essentially creating a predictable income stream. Your decision is irrevocable, so think through the implications carefully with your accountant and professional advisors.
Concentrate on equity concentration.
Executive compensation often includes substantial equity in your company’s stock. And you may be attached to it. After all, you helped build the company and are proud of what you’ve accomplished. It may be hard to imagine a time when the stock may falter. But there’s no sure thing in investing, so it makes sense to diversify your holdings to limit overexposure to just one investment.
Work with your accountant to sell your stock over time so you don’t trigger unnecessary tax consequences; violate any insider trading regulations; or infringe on any holding rules established by your company. Then work with your advisor to invest the proceeds in a more diverse range of securities.
Tip: The Securities and Exchange Commission’s Rule 10b5-1 allows you to strategically sell an established number of shares at regular intervals to avoid perceptions of insider trading.
Delay Social Security.
Consider delaying Social Security as long as possible so that the payments don’t coincide with years when you have to take large deferred compensation payments.
Keep in mind that these are general guidelines. Consult with your accountant and advisor to determine what works best for you and to get an idea of how proposed tax code changes may affect your options.