When Should You Cash Out?

Are you lucky enough to have struck it rich, at least on paper, in incentive stock options? Before breaking out the champagne, remember that turning paper profits into cash isn't as easy as you think. Figuring out when to lock in your gains means grappling with market conditions, tax consequences, your risk tolerance, even company politics.

Indeed, by the time you're ready to exercise your options and sell, you may find that your windfall has vanished. Many high-priced stocks, especially in the options-rich tech sector, have stumbled in recent weeks, leaving employees with options that are worthless for now. Meanwhile, initial public offerings are so hot, with names doubling and tripling in value on opening day, that lucky workers are lining up to exercise options and sell right away, before their shares, too, drop in price. These volatile conditions have reversed some of the conventional wisdom on options. Instead of recommending that clients hold on to take advantage of future gains and tax benefits, some investment planners are telling them to cash in as soon as they are vested.

That's not true for everyone, however. Start by coming up with a five-year plan for managing your options, says Jane King of Fairfield Financial Advisors in Wellesley, Mass. Besides allowing for tax planning, a regular schedule for exercising options means you can plan ahead for big purchases and won't be forced to sell a huge chunk when the stock is in a temporary trough. If your company grants options every year, you can always pile up more next year to replace any you have exercised.

Having an options management plan is important because in general you should have no more than 40% to 50% of your net worth tied up in your company, including its retirement plan. True, someone with millions in the bank and even more millions in options may be able to afford to wait before cashing out. But if you're a 30-year-old with $10,000 in savings, $10,000 in a 401(k), and $2 million in stock options, New York financial adviser Joel Isaacson advises selling a big chunk. To sit down with a planner and map out a strategy could cost between $500 and $1,000. Some companies also offer planning services to high-level employees.

REDUCING RISK. Even if your company has tremendous prospects, it's wise to diversify your assets. ''People in general tend to be too optimistic about their companies,'' says Lewis Altfest, another New York planner. Although your outfit beats its competitors hands down, its stock still could tumble in a broad market decline.

While reducing risk may push you to cash in, other forces are pulling at you to hold on. Owners of incentive stock options can often save thousands on taxes by holding company stock at least a year after exercising. Selling a large chunk could trigger the alternative minimum tax, which you may avoid by staggering stock sales over several years. Corporate insiders may be able to sell only at certain times, and at some companies top brass frown if you cash out. After counting the gold in your options, it's always wise to map out a long-term strategy to make the most of your windfall.

By Amey Stone

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Making the Most of Your Stock Options

TABLE: The Ideal Options Package

When Should You Cash Out?

TABLE: Consider Unloading

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