Using Stock Options to Meet College Costs

Sid is considering using nonqualified stock options (NQSOs) to fund Aaron’s college costs. He has 2,000 shares that are exercisable at $50 per share. To exercise the options, Sid can pay cash, swap employer stock he owns, or exercise and sell in a “cashless exercise,” netting the difference.  The stock value is now $100 per share. At that rate, Sid will have to pay the company $100,000 on the exercise date, which will leave him approximately $100,000. After taxes, he will net approximately $60,000 for Aaron’s college savings plan.

The income tax liability for exercising the NQSOs will be based on the difference between the stock value and the exercise price.  Any gain from NQSOs is taxed as ordinary income.

Is this strategy better than the other sources you have to fund college expenses, such as cash, stocks and bonds?

That depends. Cash flow is an important consideration, especially when college is on the horizon.

  • Have you mapped out your cash flow to consider the timing of compensation, tax payments and tuition payments?
  • What’s the right timing for exercise?
  • Are there better ways to fund college costs?

For example, some companies may permit you to gift NQSOs. Individuals can give a family member up to the annual gift tax exclusion (allowed by the IRS) each year without being subject to the federal gift tax. Check with your company administrator to determine the company’s policy on gifting stock options.

NQSOs are one of many sources for financing a college education. Should he exercise now or wait until the options are ready to expire?  A careful analysis is needed to determine when the stock options have reached their full potential.

Let us help you analyze the timing, sources of funds and tax impact of various approaches to college funding. Creating a college funding plan will help you carve out college funds to ensure there are no surprises when the tuition bill comes due.

As specialists in executive compensation, tax and financial planning, SFG Wealth Planning Services, Inc. can assist you in optimizing your personal financial planning around the timing of these options. 

*The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

Read more

Executive Compensation, Non-Qualified Deferred Compensation, Performance Stock Units, Restricted Stock Units, Retirement Planning, Stock Options

Let's Start a Conversation

We offer a complimentary “get acquainted" meeting to see if we can help you meet your financial goals.

Main Office

Georgetown Crossing Offices
3655 Route 202, Suite 140
Doylestown, PA 18902

Contact Us

Contact | Privacy Statement | Disclaimer
SFG Wealth Planning is an independent fee-only advisor. Advisory Services are offered through SFG INVESTMENT ADVISORS, INC., an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of SFG Investment Advisors’ current disclosure brochure, which describes, among other things, SFG Investment Advisors’ business practices, services and fees, is available through the SEC’s website at SFG Investment Advisors does not provide tax or legal advice.
© 2019 by SFG Wealth Planning Services, inc. - All Rights Reserved.
Site by AdvisorFlex