Timing Your Exit

You could lose valuable pay if you leave even a few days too soon

The old saw "timing is everything" takes on new meaning with early retirement. Pick the wrong departure date and you may lose a chunk of compensation, perhaps the very money making early retirement possible in the first place.

STOCK OPTIONS

When do your options vest? That's the time you are free to exercise them. Most companies allow retirees to take along their options, and you can exercise them at an opportune time later. But if unvested options expire when you leave, you might delay your departure date to coincide with the next vesting date, says Barry Glassman, senior vice-president of Cassaday & Co. in McLean, Va.

Options come in two varieties: Nonqualified and incentive stock options (ISOs). You most likely have the nonqualified kind. The main difference is in the tax treatment. When you exercise a nonqualified option and sell the stock, the profits are taxed as ordinary income. With ISOs, if you exercise the option and hold the stock, there's no tax due. If you hold that stock for at least a year, you can qualify for a maximum 15% long-term capital-gains rate when you sell it. Exercising ISOs, however, raises your chance of getting hit by the alternative minimum tax.

Whichever options you have, don't exercise them all at once. "If you wait until expiration to exercise, which plenty of executives do, you'll take the huge risk that the stock will be trading low," says Sharon Berman, a partner at Family Wealth Management Group at accounting firm Argy, Wiltse & Robinson in McLean, Va. Instead, parcel them out over time. That mitigates the risk and, Berman adds, "spreads out the tax hit."

RESTRICTED STOCK

There's not much planning you can do with restricted stock. This increasingly popular form of compensation becomes taxable to you the day it vests, usually three years from the grant date. At that time you're free to sell it. "Most executives sell enough shares after they vest to cover the taxes, then hold the rest," says Berman. After that, any gain on shares held for more than a year is taxed at the long-term capital-gains rate.

DEFERRED COMPENSATION

With these plans, you put a portion of salary, bonus, and other compensation into a company-run pool on a pretax basis. The money is invested and grows tax-free until you pull it out, presumably when you are retired and in a lower tax bracket.

There are drawbacks: First, it's hard to change deferral dates once you've selected them. More important, the pool is unsecured. If your employer goes into bankruptcy, the money is subject to creditors' claims. That's why early retirees should consider taking their deferred compensation shortly after leaving.

By Walecia Conrad

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