Imagine this: even though you get AbbVie stock every year as part of the RSU program, you don't need to include that amount in your savings or overall portfolio to achieve the goals that you want to achieve. It's an unbelievable situation but given the income and other benefits given to AbbVie executives it's not out of the ordinary.
What do you end up doing with those shares? One easy answer is to start blessing those around you by gifting the stock to them.
Pros of gifting appreciated stock to family and charities include:
Tax benefits: When you give appreciated stock to a charity, you can deduct the full fair market value of the stock on your taxes, and you don't have to pay capital gains tax on the appreciation. If you give the stock to a family member, they will inherit the stock at its current fair market value, which means they will not have to pay capital gains tax on the appreciation when they sell it.
Supporting a cause or family member: Gifting appreciated stock allows you to support a cause or family member that you care about, while also potentially receiving tax benefits.
But there can be some cons of gifting appreciated stock and these include:
Loss of control: Once you give away the stock, you no longer have control over it.
Potential for loss: If the stock value decreases after you give it away, you will not be able to recoup that loss.
Gifting appreciated stock can be more complex than gifting cash and may require the help of a financial advisor or tax professional to ensure that it is done correctly.
Alternatively, you may decide that you want to hold the stock, not include it in your ongoing savings goals but (hopefully) use it to increase the rate at which your wealth increases.
Using call options to get increase your wealth
When you accumulate a large, concentrated position of 1 stock, selling call options is a way of generating income that can be funneled back into your overall portfolio.
A call option is a financial contract that gives the contract holder the right, but not the obligation, to buy a specific underlying asset (such as a stock) at a specific price (the strike price) within a specific period (the expiration date).
One strategy for using call options to manage a concentrated stock position is to sell call options against the stock. This is known as a covered call strategy. By selling call options, the holder of the concentrated stock position can earn additional income (in the form of the option premium) while also potentially reducing downside risk.
Let's use an example - you hold $1,000,000 of AbbVie stock in your portfolio, or based on a $147 per share stock price, 6800 shares.
- Let's say you sold a contract to sell 3000 shares when the price hits $160 within 90 days.
- The person purchasing this contract is going to pay you a premium and the purchase price of this premium depends on several factors.
- As the seller of this contract what you're hoping for is that the price stays the same at $147 at the end of those 90 days.
- If the price per share goes down to $130, the person holding the contract isn't going to execute it because they don't want to pay $147 per share for something that's only worth 130. The only problem in this situation is the value of your investment has gone down.
- The problem with this strategy, if mismanaged, is if the stock price goes up and it becomes very attractive for the holder of the contract to execute it and buy your stock at a discount.
At Retirement Matters, we use a dedicated manager to run this strategy for our clients. Their main job is to make sure our clients don't come into any adverse tax situations and generate as much income as possible from these contracts.
If any of these strategies interest you, let's talk.