Incentive stock options (ISOs) are more than just a workplace perk—they’re a powerful tool that can help you build significant wealth over time. 

Picture this: You’re given the chance to buy your company’s stock at a price lower than what it’s worth today. As the company grows and becomes more successful, the value of your stock increases. It’s like having a special key to unlock wealth generation from your hard work. 

With the right strategy, ISOs can play a key role in achieving your financial goals and building long-term wealth.

Let’s break down what you need to know about incentive stock options so you can make confident decisions and take full advantage of this opportunity!

TL;DR:

1. Incentive stock options (ISOs) are a valuable benefit some companies offer to reward employees.
2. ISOs come with tax perks, but understanding the rules is key to maximizing their value.
3. A financial advisor can help you make smart decisions about exercising and integrating ISOs into your financial plan.

What Types of Companies Offer ISOs, and When Do They Offer Them?

Startups and fast-growing privately-held companies typically offer ISOs as a way to attract and keep top talent. 

Think of it as the company saying, “We believe in you, and we want you to share in our success!” These options give you the right to buy company stock at a set price, called the “exercise price,” which is often lower than the stock’s market value. Companies usually grant ISOs as part of your compensation package, especially if they want to reward long-term commitment.

What Is the Tax Impact?

ISOs come with special tax treatment, but timing is everything. When you exercise your stock options (buy the stock), you won’t pay regular income tax like you would with a bonus. Instead, you may be subject to the Alternative Minimum Tax (AMT). This happens if the difference between your exercise price and the stock’s fair market (409a) value is significant. Creating a tax projection prior to exercising your options can help you determine how many options to purchase without triggering AMT. 

If you hold the stock for at least one year after exercising and two years from the grant date, any profits are taxed at the lower long-term capital gains rate. Sell too soon, and you’ll pay higher income tax rates. It’s all about knowing the rules and planning ahead.

When Should You Buy Your Stock Options?

Timing your stock option exercise depends on a few factors: 

• Do you have enough cash to cover the purchase price and potential taxes? 
• Do you have higher priority goals – paying off debt, building your savings, etc?
• Have you received the latest 409a valuation? Is the company’s value growing steadily?
• Are you getting married or do you expect your tax picture to change? 

Balancing these factors can help you decide when to exercise your options for maximum benefit.

How Zenith Wealth Partners Can Help

At Zenith Wealth Partners, we specialize in helping you make smart financial decisions. We’ll guide you through the tax implications of exercising your ISOs and how they fit into your broader financial plan. Our goal is to make the process straightforward and stress-free so you can focus on growing your wealth and achieving your goals.

– Chelsea Ransom-Cooper, CFP

All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.