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What to Consider Before You Exercise Employee Stock Options

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Congratulations if you were recently granted stock options by your employer that are tied to the company’s stock. Options can be a lucrative part of your compensation, and you should look to take advantage of this financial opportunity.

Stock options are issued to employees of companies whose stock is publicly traded as well as to employees of companies that have not yet gone public. In the latter case, it’s a way for key employees to participate in any potential upside in the firm’s stock when the company does go public.

Some private companies also may provide stock as compensation to outside consultants and advisors as a way to reduce their cash outlay for these services and to potentially pique their interest in working with the company.

Here are some things you should know if you are granted employee stock options (ESOs) and how to determine whether it makes sense to exercise them.

How employee stock options work

Employee stock options are granted to specific employees by their companies. These stock options grant employees the right to purchase a number of shares at a fixed price for a specified period of time.

Companies may grant options to enhance the compensation of certain employees and also to provide an incentive for outstanding performance. “If the company does well, then the stock will do well too” might be the thought process of an employee holding options. It ties the financial well-being of these employees at least in part to the financial fortunes of the company.

Here are some key terms to know about ESOs:

  • Grant date: The date on which your employer granted you the options. This date is important in that any taxes due later on in the process could be tied to this date.
  • Vesting schedule: The schedule under which you eventually become vested in the options. Vesting means that you take full control of the options. The vesting schedule commences with the date the options are granted to you. The schedule will lay out the timetable over which you become eligible to exercise the options, converting the options to shares of the company’s stock. Vesting for the options may occur all at once or over a defined period of time. For example, the options might vest at a rate of 20% per year over a five-year time frame.
  • Strike price: Also known as the exercise price or grant price. This is the specified price at which you can purchase the shares by exercising the options. This price generally will be at a higher level than the stock’s price on the grant date. Note, however, that the actual price on the date you are eligible to exercise some or all of the options might be higher or lower than the strike price based on the performance of the stock over time.
  • Expiration date: The date by which your options must be exercised; otherwise, they will expire. If the options vest over time, there likely is an expiration date for each lot as they vest. If you allow the options to expire without exercising them, they become worthless.

Types of employee stock options

There are two types of employee stock options: nonqualified stock options and incentive stock options (ISOs). They differ in several ways and should play a role in the exercise strategy you choose.

“The first thing you may want to do is identify whether you have been granted nonqualified stock options or incentive stock options, as the tax implications of an exercise are materially different,” said Daniel Zajac, certified financial planner at Simone Zajac Wealth Management Group, which is based outside Philadelphia. A good portion of Zajac’s practice is devoted to advising clients on stock option-related issues.

Nonqualified stock options

Nonqualified stock options are the simpler of the two types in terms of taxation. “When you exercise nonqualified stock options, any gain will likely be taxed in the year of exercise as ordinary income, subject to payroll tax,” Zajac said.

When you exercise the option, you pay taxes on the difference between the share price at which you exercise the options and the grant price. This gain is taxed as ordinary income, just like your salary and most other types of income you might earn. Besides federal and state income taxes, the income generated by the exercise of the options would be subject to payroll taxes, such as FICA (Social Security) and Medicare, just like any other income earned from employment.

Note that once you exercise the options, if you hold the shares of stock for at least a year, any gain on the sale of those shares would be taxed at lower capital gains rates.

Incentive stock options

ISOs are more challenging from a tax perspective. “The exercise of incentive stock options is materially more complicated, as tax will depend upon how long you’ve owned the option, when you exercised the option and when you sell your shares,” said Zajac. “You may also need to plan for both ordinary income tax, long-term capital gains tax and the alternative minimum tax.”

Unlike with nonqualified options, there are no payroll taxes at the time of exercise, but the exercise of the ISO potentially would count as income for alternative minimum tax purposes.

“The alternative minimum tax, or AMT, is calculated every year along with your regular tax. As a taxpayer, you pay the higher of the two,” Zajac said. “In a calendar year that you exercise and hold incentive stock options, it’s possible that your AMT will be the higher of the two, and you should plan for this potentially large tax bill.”

The good news for many readers is that the tax reform legislation enacted at the end of 2017 raised the income threshold to trigger the AMT, meaning that fewer middle-income taxpayers will be subject to this extra tax.

Under certain circumstances, the sale of the shares after exercise of the options can be subject to the generally preferential capital gains tax rate for federal taxes. If the ISOs are held for at least a year prior to exercise and then the shares are held for at least a year after exercise, any gain on the sale of those shares would be subject to long-term capital gains rates.

The following example illustrates the advantage of paying tax at long-term capital gains rates: For 2019, someone who files their taxes as single hits the marginal 22% tax bracket for ordinary income at an income level of $39,476 and reaches the 24% marginal bracket at an income level of $84,201.

By contrast, the long-term capital gains rates for those filing as single in 2019 are:

  • 0% up to an income level of $39,375
  • 15% from $39,376 to $434,550 in income
  • 20% above $434,551

The differences in rates are similar for taxpayers who are married filing jointly.

Deciding whether to exercise the options

The stock’s market price: The most key consideration when deciding whether to exercise your options probably is where the current market price of the underlying stock is relative to the strike price on the options.

If the strike price of the options is $20 per share, for example, but the current market price of the stock is at $15 per share, you’d be foolish to exercise the options. If you wanted to purchase the stock, it would be more economical to buy it outright using a brokerage account or another method.

If the market price is below the strike price, it likely makes sense to hold the options until such time as the stock rises above the strike price. If the options expire worthless, that is still a better outcome than overpaying for shares of the stock.

Taxes: With most investment and financial decisions, taxes should be a consideration but not the driving force. If the market price of the stock is higher than the exercise price, you can set aside some of your proceeds to cover the taxes.

Additionally, you may need the proceeds from the shares to beef up cash reserves, pay off debt, cover an unexpected major expense, etc. These are all valid reasons to exercise options, but you will want to be sure that exercising the options is the best way to raise this cash prior to exercising.

Some strategies to consider

When exercising employee stock options, you can always pay cash to purchase the shares.

Beyond this, there are a few common strategies you can consider:

  • A cashless exercise occurs when vested options are exercised and the shares are sold immediately. Any excess cash from the transaction would be deposited in your account.
  • A cashless hold means you exercise a sufficient number of options to sell some of the shares. The cash from the sale will cover the cost of the remaining shares.
  • Let the options expire If the strike price is higher than the current market price of the shares, it makes no economic sense to exercise the options.

Bottom line

Employee stock options can be a lucrative form of compensation, especially if the company’s shares appreciate nicely over time. Understanding the ins and outs of managing and exercising these options can help enhance their value.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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SIMPLE IRA Contribution Limits 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

SIMPLE IRAs are tax-advantaged retirement savings accounts that benefit small business owners and the people who work for them. In addition, you can use the SIMPLE IRA to save for retirement if you are self-employed. Like many other retirement savings vehicles, SIMPLE IRAs are subject to annual contribution limits.

SIMPLE IRA contribution limits

The annual SIMPLE IRA contribution limits for employees and employers in 2020 are as follows:

Annual SIMPLE IRA Contribution Limits

Employees under the age of 50


Employees 50 years and older

$13,500, plus $3,000 in catch-up contributions

Employer matching contributions

Up to 3% of employee’s salary

Employer non-elective contributions

2% of the employee’s salary

SIMPLE IRA contribution limits 2020 for employees

For 2020, the amount employees may contribute to a SIMPLE IRA plan is capped at $13,500 per year. That’s an increase from 2019’s limit of $13,000, and an even bigger leap from the $12,500 limit imposed from 2015 to 2018.

It’s worth noting that for employees who are also participating in other employer-sponsored retirement plans, such as 401(k) or 403(b) plans, aggregate annual contributions to all plans cannot exceed $19,500 in 2020. For those 50 and older, the overall annual limit for catch-up contributions is $6,500 for 2020, for a total ceiling of $26,000.

SIMPLE IRA contribution limits 2020 for employers

If a small business owner chooses to offer a SIMPLE IRA plan, they are required to make contributions to their employees’ accounts. They may choose to either match their employees’ contributions, up to a certain limit, or make non-elective contributions.

If an employer chooses matching contributions, their match is capped at 3% of an employee’s annual compensation. While an employer can make matching contributions of less than 3%, the match cannot be less than 1% of the employee’s annual compensation — and it cannot be less than 3% for more than two out of five consecutive years.

If an employer chooses non-elective contributions, they are required to put money into their employees’ SIMPLE IRAs regardless of whether the employees themselves make contributions. With non-elective contributions, the employer must make fixed contributions of 2% of their employees’ compensation. For 2020, the maximum amount of an employee’s total compensation that can be considered for calculating a non-elective contribution is capped at $285,000, up from 2019’s cap of $280,000.

What are the contribution deadlines for a SIMPLE IRA?

Employers are required to deposit their employees’ SIMPLE IRA contributions within 30 days after the end of the month in which those contributions were withheld. Employers are required to make their matching or non-elective SIMPLE IRA contributions by their tax return filing deadline, including extensions.

For people who are self-employed, the deadline for depositing SIMPLE IRA contributions for a calendar year is 30 days after the end of year, or Jan. 30.

SIMPLE IRA contribution limits vs. Roth contribution limits

While SIMPLE IRA contributions are capped at an annual limit of $13,500, annual Roth IRA contribution limits are much lower. For 2020, Roth IRA contributions are capped at $6,000, with an additional $1,000 allowed for catch-up contributions for those 50 and older.

Another differentiating factor of Roth IRAs is that they have income phaseout limits. Depending on how much you make, you may be limited to how much you can contribute or whether you can contribute at all. For 2020, single filers cannot contribute to a Roth IRA if they make more than $139,000, and if married and filing jointly, you’re only able to contribute if you earn less than $206,000.

Can you contribute to both a SIMPLE IRA and a Roth IRA?

You can contribute the maximum allowed amounts to both a SIMPLE IRA and a Roth IRA, as their contribution limits are not cumulative. In fact, most financial advisors recommend you max out both your SIMPLE IRA and Roth IRA if you can afford to do so, as they offer different tax benefits.

While SIMPLE IRA contributions are made pre-tax, and therefore lower your taxable income, your Roth IRA contributions are made with after-tax dollars, so qualified distributions are tax-free.

“Advisors talk about diversification all the time, and usually they are talking about stocks and bonds,” said Gregory Kurinec, a certified financial planner with Bentron Financial Group in Downers Grove, Ill. “But investors will want to diversify their accounts into different tax categories as well. By having a combination of pre-tax (SIMPLE IRA), after-tax advantage (Roth IRA) and non-qualified, this will allow the investor to pick and choose which account to take funds from to best impact their tax situation.”

What is a SIMPLE IRA?

A SIMPLE IRA is an effective retirement savings match plan, especially for small business owners. SIMPLE IRAs are available to small businesses with 100 employees or fewer.

SIMPLE IRAs require employers to make contributions on behalf of their employees, either up to 3% of their employee’s compensation as an employer match or a flat 2% of the employee’s compensation.

As with most financial products, when it comes to saving for your golden years, a SIMPLE IRA is just one of the many options available to you. Explore all of the options at your disposal when deciding how to build your nest egg.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Review of Altfest Personal Wealth Management

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Altfest Personal Wealth Management is an investment management firm based in New York City. The firm typically only accepts clients with a minimum investment of $1 million. For these high net worth clients, Altfest Personal Wealth Management provides customized investment portfolios with comprehensive financial planning services. The firm has 16 employees who provide investment advisory services, and currently oversees $1.21 billion in assets under management (AUM).

All information included in this profile is accurate as of February 10th, 2020. For more information, please consult Altfest Personal Wealth Management’s website.

Assets under management: $1,210,000,000
Minimum investment: $1 million (waivable at the firm’s discretion for young professionals)
Fee structure: A percentage of AUM, ranging from 0.50% to 1.40%, depending on account size; hourly fees; fixed fees
Headquarters: 445 Park Avenue
Sixth Floor
New York, NY 10022

Overview of Altfest Personal Wealth Management

Dr. Lewis Altfest launched Altfest Personal Wealth Management in 1983. He is still the majority owner of the firm and acts as CEO. He runs the organization along with his wife, Dr. Karen Altfest, the firm’s executive vice president, and their son, Andrew Altfest, the firm’s president. Both Lewis and Karen hold Ph.Ds; Lewis is an associate professor of finance at Pace University.

Including the Altfests, the firm has 37 total employees, 16 of whom provide investment advisory services. Altfest Personal Wealth Management specializes in creating customized, actively managed investment portfolios for high net worth clients. The firm and the Altfest family have won numerous awards for their performance, and both Lewis and Karen are regular contributors to financial news programs and publications.

What types of clients does Altfest Personal Wealth Management serve?

Altfest Personal Wealth Management primarily works with individual investors. A client usually needs a portfolio of at least $1 million to open an account with the firm — however, Altfest does make exceptions to this account minimum for “young professionals” who they believe will become high net worth clients in the future. The firm’s individual client base is currently split 40/60 between individuals and high net worth individuals, with the SEC defining high net worth individuals as those with at least $750,000 under management or a net worth of at least $1.5 million.

While the firm works with a diverse range of clients, it specializes in advising women, executives and healthcare professionals. In addition to individual investors, Altfest Personal Wealth Management also works with pension plans, profit-sharing plans, trusts, estates, corporations and other business entities.

Services offered by Altfest Personal Wealth Management

Altfest Personal Wealth Management specializes in investment management and financial planning. However, the firm’s investment management services are available to individuals and small businesses only; these services are not offered to investment companies, pooled investment vehicles, large businesses and institutional clients.

Most of the firm’s investment accounts are run on a discretionary basis, meaning that Altfest Personal Wealth Management advisors can make trades on behalf of the client. The firm does have a few nondiscretionary accounts, where the client must approve all trades themselves.

If a client only wants a few investment recommendations, rather than the management of their entire portfolio, the firm can provide this service as well.

Altfest Personal Wealth Management also offers comprehensive financial planning, as many of its advisors hold the certified financial planner (CFP) designation, a professional certification for financial planners. The firm’s financial planning services include the creation of a detailed financial plan outlining the necessary steps to achieve their goals and objectives. The plan can address specific areas, such as college savings, estate planning and debt management.

More specifically, Altfest’s services include:

  • Investment advisory services and portfolio management (mainly discretionary but some non-discretionary)
  • Financial planning
    • Retirement planning
    • Trust and estate planning
    • Charitable planning
    • Education planning
    • Tax planning
    • Cash flow forecasting
    • Budgeting and strategic planning
    • Long-term care planning
    • Debt management
    • Divorce planning
  • Insurance and risk management
  • Workshops and seminars
  • Newsletters and publications

How Altfest Personal Wealth Management invests your money

Altfest Personal Wealth Management builds unique, customized portfolios for each client based on their time horizon, risk tolerance, income level and long-term goals.

As part of this analysis, the firm follows a system called Total Portfolio Management. Rather than only looking at a client’s investment history, the firm also gets to know their entire financial plan, including income, debts, spending requirements and future earnings potential. The firm uses this information to finetune a portfolio comprised of stocks, bonds, mutual funds, ETFs and private funds.

Altfest Personal Wealth Management follows an active investment approach: this means the firm is regularly trading in an attempt to earn above-average portfolio returns.

Fees Altfest Personal Wealth Management charges for its services

For portfolio management services, Altfest Personal Wealth Management charges a fee based on a percentage of assets under management, with the rate ranging from 0.50% to 1.00%, depending on the size of the client’s portfolio. Altfest does not charge trading commissions or performance-based fees.

Portfolio Size Annual Asset-Based Fee
First $3 million* 1.00%
Between $3,000,001 and $6,000,000 0.75%
Over $6,000,000 0.50%
*If a portfolio falls below $2 million in value at the end of the quarter, the firm will assess an additional 0.10% fee on top of the asset-based fee listed above.

For “young professional” clients who don’t meet the firm’s portfolio minimums, Altfest charges the following fee schedule:

  • In the first year, the firm charges an annual fee of either 1.10% of assets under management or $2,500 whichever is greater.
  • After the first year, the firm charges 1.10% of the portfolio value or $1,500 per year whichever is greater.

This rate includes cash flow analysis, investment analysis, investment management and 401(k) recommendations. Clients who want additional financial planning services will be billed at a rate of $250 per hour.

If a client only wants standalone investment recommendations, Altfest Personal Wealth Management charges either an hourly fee ranging from $500 to $800 an hour, or a fixed fee of at least $3,500 for specific investment recommendation requests.

Finally, some of the investments included in Altfest’s portfolio recommendations may carry additional fees. Clients are responsible for covering these costs, though the money won’t go to Altfest Personal Wealth Management.

Altfest Personal Wealth Management’s highlights

  • Wide range of awards: Over the past few years, Altfest Personal Wealth Management has been recognized as a top investment advisor by publications including Barron’s, Forbes, Financial Times and Financial Advisor magazine.
  • Highly educated management team: The heads of the firm, Dr. Lewis Altfest and Dr. Karen Altfest, both hold Ph.Ds; Lewis is also an associate professor of finance at Pace University. In addition, many of the financial advisors at the firm hold the CFP designation.
  • Customized investment approach: Altfest Personal Wealth Management designs a customized portfolio for every client, tailored to their specific needs, and don’t lump people into one-size-fits-all funds as some firms may do.
  • Extensive financial planning in addition investing: Altfest Personal Wealth Management also specializes in financial planning. When the firm creates a portfolio recommendation, it goes over a client’s entire financial situation before designing the portfolio, not just their existing investments.
  • Specialty in advising women, executive and healthcare clients: The firm specializes in advising women, executives and professionals in healthcare. Additionally, Forbes named Dr. Karen Altfest one of the top women advisors in the country in 2017, 2018 and 2019.

Altfest Personal Wealth Management’s downsides

  • Above-average investment fees: Altfest Personal Wealth Management charges an annual 1.00% asset-based fee on the first $3 million in a client’s account (plus an additional 0.10% per quarter if their portfolio value falls below $2 million). In comparison, the median investment management fee charged by firms for accounts over $2 million is 0.75%, according to Kitces.
  • High minimum to open an account: It takes at least $1 million to open an account with Altfest Personal Wealth Management. While the firm does waive the minimum at its discretion for “young professionals,” the typical investor would need to be quite wealthy to make use of the firm’s services.
  • Only has one location in New York City: The only way to visit the Altfest Personal Wealth Management office in person is in New York City, the firm’s only location.

Altfest Personal Wealth Management disciplinary disclosures

Whenever an SEC-registered firm or its employees or affiliates face disciplinary action, including a criminal charge, a regulatory infraction or a civil lawsuit, the firm is required to report that incident in its Form ADV, paperwork filed with the SEC. Altfest Personal Wealth Management reports in its Form ADV that it has faced no such incidents over the past 10 years, indicating a clean disciplinary record.

Altfest Personal Wealth Management onboarding process

To start the onboarding process with Altfest Personal Wealth Management, you can request a free consultation with one of its advisors. You can contact the firm either by phone at 212-406-0850, by email at [email protected] or by filling out a form on the firm’s website. As part of the onboarding form, the firm asks you to share your story, which helps the firm start determining whether you are a good fit based on your income and profession.

If it seems like a good match, the firm’s advisors will then get to work designing your customized investment portfolio based on your goals, risk tolerance and overall financial situation. When you’re ready to launch, the firm’s advisors would then take care of opening your new accounts, transferring over your existing accounts, making the necessary investments and keeping up with the records for your portfolio.

The bottom line: Is Altfest Personal Wealth Management right for you?

If you’re a high net worth individual or a young professional who wants personalized investment recommendations combined with financial planning, Altfest Personal Wealth Management could be a good choice. This may be especially true if you are in one of the firm’s specialty client categories: women, executives and healthcare professionals. Since Altfest Personal Wealth Management only has one location in New York City, however, the firm might be a better choice if you live in the Northeast rather than other parts of the country.

On the other hand, Altfest Personal Wealth Management’s comprehensive services do not come cheap. The firm’s fees are higher than average, and you’d need at least $1 million to open an account (unless Altfest waives the minimum because you’re a young professional). If you want a simpler investment strategy or prefer to manage your portfolio more on your own, you could find less expensive advisors than Altfest Personal Wealth Management.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.