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Chris Chen CFP CDFA is a Wealth Strategist with Insight Financial Strategists LLC in the Boston area. He specializes in retirement planning and divorce financial planning

May 27

Steps to a Divorce Diagnostic

By Chris Chen CFP | Divorce Planning

Steps to a Divorce Diagnostic

Divorce DiagnosticPeople who are contemplating divorce are often overwhelmed with the process. That’s completely normal. After all divorce is not something that you do every day.

As a Divorce Financial Planner and Wealth Strategist, I work with women and men who are contemplating divorce, going through divorce or recovering from divorce. Every one of these men and women are going through significant upheaval in their lives. They all need a Divorce Diagnostic .

So, where should you begin?

As a Divorce Financial Planner, it should come as no surprise that I would advise you to deal with your finances first and get a Divorce Diagnostic . There is an old saying that marriage is about love, and divorce is about money. This is not entirely true. Divorce is an emotionally draining process that is about a lot more than money. Yet in the end, whether it is the amount of assets you will get, the child support you will pay or the legal retainer you will pay, it often comes down to the money.

After a divorce there will usually be a lot less money with which you will now have to run your households. You will have to consider the tax and cash flow consequences of keeping or selling the marital home. You may need to reconsider your retirement planning. The list is long.

However, there are seven steps that you can take before you start your divorce process leading to a Divorce Diagnostic ™ that may make the process less painful.

1. Take an inventory of all your financial records.

As a first order of business, you need to gather all financial records of both you and your spouse, including bank account information, tax returns, mortgage statements, credit card bills, wills, trusts, life insurance policies and retirement accounts, to name a few. Be especially mindful of assets either of you believes have no value or indeterminate value, such as employee stock options, unqualified executive compensation plans and defined benefit pensions. Disputes often center around specific assets. It is important to know what they are and where they are.

2. Open new bank and credit accounts in your own name.

You should have your own source of funds. Open a checking account in your own name, preferably at a different bank from where you hold your joint account. If you do not have a credit card in your own name (not a joint credit card), get one. If you have no income of your own that may be difficult. Before you open your checking account, you may want to verify that the bank will give you a credit card also.

3. Monitor your credit report.

This is a good way to keep a pulse on how your financial situation will be evolving until you divorce. The credit reporting companies allow you a free copy every year. You should take advantage of this offer.

4. Start budgeting for legal and professional fees.

Divorce is expensive. You will likely require the help of professionals including lawyers, mediators, divorce financial planners and mental health professionals. Make sure that you have funds available for these expenses.

5. Consider alternatives to litigation.

Explore options such as mediation or a collaborative divorce. If you have reasonably good communication with your spouse, these alternatives may be quite a bit less expensive than the traditional litigation model. The goal is to get through divorce intact, not to spend all your assets on legal fees.

6. Assemble a team.

Not unlike a sports team, each player has a role. You will need a family lawyer to review the legal aspects of your divorce. You may need a therapist to help you deal with the emotional rollercoaster. You and your spouse may decide to use a mediator. And you will need a Divorce Financial Planner to help you with the financial aspects of divorce.

7. Conduct a Divorce Diagnostic ™.

A Divorce Diagnostic ™ will allow you to get a good grasp of your financial situation, and likely outcomes, right at the beginning of the process. You will then be able to plan accordingly and make sound decisions on how to move forward. Gaining control of the process before it gets control of you will allow you to best achieve a favorable outcome.

Divorce is a lot of work that can seem daunting. Completing these seven steps will help you feel more in control and better equipped to make thoughtful, reasoned decisions.

You want to come out of divorce in the best financial and emotional shape possible, with the well-being of your children protected, your assets preserved and a sound long-term financial plan in place.
(A previous version of this post was published in the Boston Globe)

Apr 12

The Dirty Dozen Tax Scams

By Chris Chen CFP | Financial Planning , Investment Planning , Tax Planning

The Dirty Dozen Tax Scams

IRS Tax buildingI recently read the IRS Dirty Dozen Tax Scams, 2015 edition, the government’s annual guide for taxpayers to potential tax scams, so you wouldn’t have to!

The first item of interest, although at the bottom of the IRS list, are issues with various phone or email scams.  “Whether it’s a phone scam or scheme to steal a taxpayer’s identity, there are simple steps [for consumers] to take to help stop these con artists,” IRS Commissioner John Koskinen says.

At the top of the list of things the IRS wants us to beware of are telephone and email scams. If someone calls claiming to be from the IRS and pressures you to give him or her money, hang up. If you receive an email from someone claiming to be with the IRS and asking for personal information or money, delete it.

The IRS also advises that taxpayers stay on the alert for identity theft, especially around tax time.

(earlier versions of this posts were published on nerdwallet and the Christian Science Monitor)

Mar 03

How should I use the 529A Account?

By Chris Chen CFP | Financial Planning

How should Iuse the 529 Account?

author: Julia Wolf thru wikimedia commons; http://creativecommons.org/licenses/by-sa/2.0/deed.en; no changesThe first part of this post described 10 key features of the new 529A Account created by the ABLE Act that was passed by Congress in December 2014.  Let us know if we can send you a copy or a link to the entire article.  This second and final part discusses implications for disabled loved ones.

The 529A comes with built-in advantages such as relatively low costs (expected), tax advantages, and the ability to have up to $100,000 in assets without jeopardizing access to public support programs.

The new plan should be very attractive to many middle class families. Similar to the intent of the the 529 college plan for college bound students, the 529A allows families to set aside money for their disabled loved one, and use it as needed, while limiting the impact of unforeseen expenses on their lifestyle.

However, the 529A has restrictions for annual contributions and maximum balance which may make an account delicate to manage. It is not a vehicle for disabled people to accumulate more than $100,000. In fact due to the relatively low balance limit, the vagaries of market fluctuations that it may be subjected to, and the inevitable withdrawals that will occur, many people will want, if they can afford it, to supplement a 529A with a Special Needs Trust.

Due to the contribution limit, the accumulation phase of the 529A could last up to 7 years, making accumulation a medium term investment horizon. Perhaps one way to manage accumulation would be to contribute $14,000 for three or four or five years and then let the investment grow (hopefully to $100,000) over time. The distribution phase starts as the balance approaches $100,000. While it appears that according to the rules the beneficiary’s Supplemental Security Income will suspend when the balance goes over $100,000, it is not clear yet how this suspension would be implemented. Will “any” peak above $100,000 trigger the suspension? Or will it be the balance as of an arbitrary date, say at the end of the month? Rules and regulations are still being written, so we don’t have that answer yet.

Nonetheless, the key is that the balance will have to be managed, and drawn down as necessary so as not to exceed the magic $100,000 balance limit. Given the general upward bias of financial markets, it would imply that it may be best to 1) manage the balance to a level of safety below $100,000 like, say, $90,000; and 2) plan a periodic monthly withdrawal to cover ongoing expenses.

Using the 529A as a checking account cum investment account is not necessarily optimal. Most of us dissociate our checking accounts from our investment accounts for good reasons. And yet, the 529A seems to be designed to be used as both, primarily because 529A investment earnings are expected to be tax free (checking accounts are effectively tax free since they have no earnings to tax). Hence the only way to earn a windfall from the 529A is to invest.

Many readers will be familiar with the sequence of return problems that can come with a retirement account: when a new retiree takes initial withdrawals in the same period that the financial markets experience a downturn, the risk of running out of money before end of life increases tremendously. The same will be true for the 529A, especially since the time horizon can be so much longer than for retirement. While a 30 year retirement is common, it is likely that many 529A beneficiaries will need their account for up to 60 years or longer. In the absence of a party willing and able to replenish the account, for instance, by another relative after the parents pass away, 529A accounts may still need to be supplemented by Special Needs Trusts. Actually, 529 accounts fit well as a stop-gap before Special Needs Trusts are funded, as many Special Needs Trusts remain unfunded until life insurance pays up after the death of the parents.

Since 529A accounts are not offered yet as of the time of this writing, we don’t know what kind of investment options will be available. As mentioned, the accumulation phase could be for as little as 7 years, which makes it a medium term investment horizon, followed by a very long distribution phase (up to 60 years or longer) during which the main investment need will be for income, and the need to manage the balance to under $100,000. That is very different from 529 College plans which have up to 18 years accumulation and then distribute over a 4 to 5 years period.

States which will offer 529A Plans will be well advised to propose different investment offerings than those offered for their college plans. For instance, the standard age based investment options currently offered by most college plans will probably not be appropriate. In addition, because participants will sometimes draw from the 529A account in declining markets, they will likely demand solutions that are relatively insensitive to downward market fluctuations. The temptation will be to leave it in cash or near-cash, thus giving up on a critical feature, the ability to grow investments tax-free.

The 529A is not a perfect vehicle. However, it is a great new tool to help disabled people. It will allow more families to plan support for their disabled family members with an easy-to-use framework that should be relatively low cost and may provide additional funding in the form of tax free earnings. In addition, 529A Accounts supplement rather than replace Special Needs Trusts by filling a gap for the period before Special Needs Trusts are funded

Let us know if you would like a copy of  Part 1 and Part 2 of this article on the new 529A, or if you have further questions.

(A previous version of this article originally appeared in nerdwallet.com)

Feb 13

10 Things to know about the 529A

By Chris Chen CFP | Financial Planning

Ten things to know about the 529A Account

529AIn the week leading up to Christmas 2014, the US Congress passed the Achieving a Better Life Experience Act (the ABLE Act) , creating the 529A account to provide tax advantaged benefits for disabled individuals. It is a significant change to the financial planning landscape for special needs beneficiaries, with the potential for helping many families with disabled members.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A account is meant to allow tax advantaged accumulations and distributions for a wide range of expenses for the disabled beneficiary. The following lists some of the specifics, similarities, and differences that the 529A Account features:

1. The 529A Account uses the Social Security definition of disability. In addition it can benefit only people who have been diagnosed with a qualifying disability prior to age 26.

2. Like the 529 College Plans, the 529A plans will be set up on the state level. Presumably, the same state agencies that oversee the 529 College Plans will be responsible for the 529A, although that may differ from state to state.

3. There can be only one 529A account per beneficiary, normally in his or her state of residence. That is different from the 529 college plans, for which there is no limitation on which state plan is used, and where the distributions are made.

4. Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.

5. Contributions in the 529A are with after tax money and are limited to $14,000 a year (in 2015) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.

6. Investment growth in the 529A is tax-free.

7. Distributions are tax-free so long as they are used for qualified expenses. Otherwise, earnings on distributions are taxed at ordinary income rates with a 10% penalty added. Qualified expenses include housing, transportation, health and wellness, education and more.

8. Having a 529A does not disqualify the disabled individual from Federal and State aid, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Effectively that caps the 529A Account to $100,000.

9. Should the 529A account balance exceed $100,000, Supplemental Security Income would be suspended, but not terminated. Once the balance falls below $100,000, benefits would be resumed.

10. The limitations on contributions and on balance levels suggest that the 529A could be used as a hybrid between an investment account and a checking account.

In the next post we will discuss some of the subtleties and implications of the 529A for planning for disabled love ones.  Let me know if you would like me to email you a link to the next post!

(a previous version of this post appeared on Nerdwallet.com)
Jan 14

3rd Annual Symposium on Divorce Financial Issues

By Chris Chen CFP | Divorce Planning

3rd Annual Symposium on Divorce Financial Issues

Highlights include overall tax considerations, retirement planning, child & spousal support, social security both now and in the future, and more.

While marriage may be about love, divorce is usually about money. As such, the Symposium on Divorce Financial Issues is aimed at providing a deeper perspective of tax and other financial issues. Divorce is a critical decision-making time in people’s lives; it occurs in a highly stressful environment where husbands and wives often don’t grasp all the facts and thus may be ill-equipped to evaluate the long-term implications of their decisions.

This symposium is directed toward divorce professionals, including lawyers, CPAs, mediators, coaches and any other professionals interested in divorce issues. Our goal is to ensure that your divorcing clients become better informed of all financial issues and any consequences.

The day’s agenda will cover a broad spectrum of financial issues. Financial planners often spend 80% of their effort dealing with tax issues which impact only 20% of a divorced person financial future, while non-tax issues often contribute 80% of the financial impact on a divorcing individual’s life and get a lot less attention. This symposium will open the doors to better service and results for your clients.

The Symposium will be held on Friday February 13 February 20 from 8:45 AM to 4PM at the Oakley Country Club in Watertown at 410 Belmont Street, Watertown, MA 02472.

The program speakers are a distinguished group of divorce practitioners and will include Justin Kelsey, Esq, Chris Chen, CFP®, CDFA™, Diane Pappas, CDFA™, Tom Seder, CDFA™, Jessie Foster, CFP®, CDFA™

The cost of attendance to the Symposium is $95 for early birds who sign up before February 6, and $195 for others, including a continental breakfast and a buffet lunch.  The profits from the Symposium will be donated to the Greater Boston Food Bank.  Please sign up here and enter code EARLYBIRD for the discount.

Jan 10

New Year Resolution

By Chris Chen CFP | Financial Planning

New Year Financial Resolution

New Year Champagne

New Year Financial Resolutions

According to the Fidelity New Year Financial Resolutions Study (that was completed late in 2013) 54% of Americans were considering making a New Year resolution regarding their finances, as compared to 35% who reported this in 2009. As New Year receded into a snow storm, there were probably even more of us who made a financially-related New Year resolution, in addition to others.

The top three financial New Year resolutions are:

  • saving more (54%)
  • Paying off debt (24%)
  • Spending less (19%)

Survey respondents favored long term financial goals over short term goals by 53% to 39%. The leading long term financial goal was saving for retirement in a tax deferred account such as a IRA or a 401(k) (53%), followed by savings for college (35%) and saving for retirement health care costs (28%).

However, our good intentions notwithstanding, almost half of us were concerned that the continuing uncertainty around the economy, the debt ceiling struggles, and the ongoing threat of higher interest rates could deter our good resolutions. In addition, as we all know from experience, New Year resolutions are not easy to implement. How are you doing with your New Year resolution?

While we may not be able to help you stick to your gym routine, we can help you with financial New Year resolution. Here are a few things to keep in mind:

  • Make a plan! It is very easy to stray when you haven’t set specific goals for yourself.   We can show you how to get your plan in order.
  • Determine risk. The proper level of risk is different for every investor. We can help make sure you are not taking on more risk than you are willing to take. If you are concerned that the market has become too exuberant, pay particular attention to risk.
  • Consolidate. Are your investment accounts scattered? Combining old or ineffective accounts can maximize your return and make tracking your investments much easier.
  • Know what it is costing you. Beware of hidden fees and costs that can impact your investments. We make sure you are aware of all costs and fees to ensure you know exactly where and how your investment dollars are being spent.

Every good New Year resolution needs a support system. A best friend to keep you honest at the gym. A house mate to give you the eye when you head to the fridge. And a financial planner to guide you to the most informed investment decisions. Contact us so today so we can help you put your New Year’s resolutions back on track.

 

A previous version of this post was published in the Boston Globe

Jan 04

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

By Chris Chen CFP | Financial Planning

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

529AIn the week leading to the Christmas holiday, the US congress passed the ABLE Act of 2014 as part of the Tax Increase Prevention Act of 2014. ABLE stands for Achieving a Better Life Experience. The Act creates the new 529A plan. It is a significant change to the financial planning landscape for special needs beneficiaries.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A is meant to help people with disabilities as defined under Social Security rules and will allow tax advantaged distributions for certain expenses for the disabled beneficiary including housing, transportation, health and wellness, education and more without disqualifying the disabled individual from Federal and State aid.

As with the current 529 plans, for funds not used for qualifying expenses, any investment growth would be taxed as ordinary income plus a 10% penalty. Additionally, the funds can be rolled over tax-free from one ABLE account to another and the designated beneficiary can be changed from one disabled person in a family to another in the same family.

In theory the 529A will be limited to the same maximums that apply to 529 plans in their respective state. However, in practice the maximum amount that can be held in a 529A will be limited to $100,000.  Above that amount, the beneficiary may lose his or her qualification for Medicaid coverage.  In addition, a maximum of $14,000 can be contributed annually to a 529A.

There are other differences between the 529A and the current 529 plans. For example, it appears that the 529A will only be able to be used in the beneficiary’s resident home state. Hence, if the beneficiary moved, it may require rolling over the 529A from one state plan to another. That is different from the college 529, for which families can use the best state plan that they can find, including out of state plans.

The 529A is a great new tool to add to the panoply available to help disabled people. It will allow more middle-income families to plan support for their disabled family members with an easy to use framework that should be relatively low cost. The 529A comes with built-in advantages such as lower costs and tax advantages. On the other hand, there are restrictions for annual and maximum contributions to the 529A. On balance, the new plan should be very attractive to many middle class families.

It will take some time for 529A rules to be finalized and for states to roll out the plans. Hopefully, Massachusetts will be at the vanguard!

(an earlier version of this article also appeared in the Boston Globe)

Dec 05

Welcome Tom!

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

We are pleased to announce that Tom Seder CDFA has recently joined Insight Financial Strategists as a Wealth Strategist. Tom is a seasoned professional who brings a wealth of experience to our firm. He focuses on helping his clients invest and plan for Retirement and navigate the process of Divorce Financial Planning.

Almost everyone has concerns and questions about their financial futures: Will I run out of money before I die? How much risk can I take with my portfolio? How should I plan for healthcare costs in retirement? Are annuities worth the cost? What is my best strategy for collecting Social Security? How can I best provide for my surviving spouse? Should I keep the marital home or downsize or rent? Do I have appropriate insurance? How will I pay for college for my kids? The list is endless…there are many pieces to the puzzle, and Tom can help to assemble the puzzle and work with you to plan for a secure retirement with more confidence.

During his career as a Financial Advisor for a large brokerage house, Tom was struck by the particular financial difficulties and hurdles which divorcing clients faced and decided to specialize in the area of divorce planning. His own divorce experience, which included two separate modification of support actions and a trial, makes him committed to exploring practical resolutions which are in the client’s best interest, both financially and emotionally.

Tom graduated from Harvard College magna cum laude with a Bachelor’s degree in Psychology and Social Relations. He has two grown children who live in New York and the Washington DC area.  Tom is an avid bridge player and is a golf member at Oakley Country Club in Watertown.  He has completed the Financial Planning program at Boston University and is a Certified Divorce Financial Analyst. He is a member of The Divorce Center and the Institute for Divorce Financial Analysts.

Contact Tom with your questions!

Aug 30

Gender Lens Investing

By Chris Chen CFP | Financial Planning

 

Gender Lens Investing

By Harshita Mira Venkatesh

gender lens investing“Study after study has shown that when women are fully empowered and engaged, all of society benefits” according to Deputy United Nations secretary Asha-Rose Migiro.

While there are plenty of initiatives on a global scale to empower women in society, much progress still needs to be made in the corporate world: only 13 of the 500 largest corporations in the world have female CEO’s.

Women have been hindered in the corporate world because on average, they have less access to capital than men. In practice, this means that if a man and a woman both held the exact same job then on an average the woman would be earning less, and would face more discrimination because of her gender.

Additionally if the woman were from a minority race, the level of discrimination increases and her access to capital decreases even further.  In broader terms, women haven’t been able to succeed not because of genetic predisposition but because of the dearth of resources available to them.

As investors and global citizens we need to begin re-evaluating the success of the companies and organizations today through gender lens investing.

Gender lens investing means evaluating companies based on how their contributions to enhancing the status of women either by evaluating them on criteria such as:

1) The number of women they have on their boards, in senior management or in the work force.
2) The efforts the company makes towards enhancing the status of women in the community though their Corporate Social Responsibility Efforts.

From an Investors Perspective How Effective is Gender Lens Investing?

A 2012 study from the Harvard Business School showed that companies with an average of three women on the board of directors have a Higher Return on Equity Invested (by almost 60%) compared to companies with absolutely no women on the board of directors.

It has also been observed that micro-finance institutions catering towards women clients have fewer write-offs and see regular streams of loan repayment.

And in 2009 a Silicon Valley study showed that venture funded companies which were run by women have 12% higher returns on average.

This just goes to show that gender lens investing may just be smart investing.

How should you begin gender lens investing?

As of this writing, there are 333 mutual fund products which cater to ESG criteria (Environmental, Social and Corporate Governance), and several of these products were modified with a gender lens investing focus. Here are a few notable ones:

The Calvert Foundation launched WIN-WIN (Women Investing in Women Foundation) which was started in 2012 and aims to invest 20 million dollars in organizations which empower women.

The PAX Elevate Global Women’s Index Fund, seeks investments that closely correspond or exceed the performance of the PAX Global Women’s Leadership Index (the first and only broad market index consisting of highest rated companies in the world in advancing women’s leadership as rated by PAX gender analytics). The fund has returned 8.13% annually since inception in January 27, 2011 till December 31, 2013. In this very same period the Index has returned 7.86% annually.

GWEF (Global Women’s Equity Fund) was a purely gender lens investing oriented fund launched by the Toronto based Global Women Equity Corp. in 2013. The fund tries to invest in companies which have demonstrated support for women’s causes and are leaders in promoting women in the corporate workplace.

On July 9, 2014 Barclays launched a Women in Leadership Index and ETN (Exchange Traded Note). The Barclays index includes 83 U.S.-based companies that are listed on the NASDAQ or the New York Stock Exchange and have at least $250 million in market capitalization. Thirty-five of these companies have female CEOs.

Gender lens investing doesn’t seek to isolate successful male dominated companies. Rather gender lens investing asserts that gender heterogeneity in corporations is conducive to more educated decision making and better performance.   To learn more about gender lens investing consult your financial professional regarding the options available.

_____________________________________________________________________________

This blog post is contributed by Harshita Mira Venkatesh, a student at the University of Rochester majoring in Financial Economics and Applied Mathematics.  Harshita was also a summer intern at Insight Financial Strategists LLC for the Summer of 2014.  She intends to pursue a career in equity research analysis.

Note:  All content provided on this blog post is for informational purposes only. We make no representation as to the accuracy or completeness of any information on this site or any information found by following any link on this site. The information is general in nature and may not be applicable or suitable to an individual’s specific circumstances or needs. Application to an individual situation may require considerations of other matters. The investments featured in this blog post are for illustration purposes only. No representation is made as to their suitability for any individual’s portfolio. If you have questions about the mutual funds described, please contact your investment professional.

Jul 24

Five Considerations For Managing Your Employee Stock Options

By Chris Chen CFP | Financial Planning

Five Considerations For Managing Your Employee Stock Options

Five Considerations for Managing Your Employee Stock OptionsAccording to the 2010 General Social Survey, approximately 8.7% of Americans in the private sector have Employee Stock Options. More have restricted stock, restricted stock units, phantom shares, and so on. The odds that you own them yourself are good especially if you are in senior management. If you are among the lucky few, it is a financial opportunity to build wealth in a way that is difficult with a regular salary. However, because of their special nature Employee Stock Options require special planning.

Employee stock options allow you to purchase your employer’s stock at a pre-determined price. When you exercise the option and purchase the stock you are expected to make a profit. As you ascend in seniority, you are likely to receive more employee stock options and eventually they may form a large portion of your compensation.

A long time ago when I used to receive employee stock options, a mentor instructed me that ESO were a unique opportunity for an employee to build wealth. I agree. However, employee stock options are more complicated than traditional financial instruments such as stocks, bonds, or 401(k) accounts. Their actual value can be volatile, and the impact on your portfolio wealth uncertain if you do not plan for it.

Five key steps to watch are: 

1. Know what you have

Consider what kind of instrument you have. Most people get Non Qualified Stock Options (NQSO); others get Incentive Stock Options (ISO). The major difference is how and when they are taxed. It is important to know what you have so you can plan accordingly

2. Plan for taxes

The good news is that employee stock options receive tax benefits under current Federal law. The down side is that you will eventually owe taxes. NQSO are taxed as ordinary income when they vest. They also incur payroll taxes. ISO are taxed when the underlying stock is sold, i.e. after you have exercised the stock. If you sell the stock more than one year after you exercise it, it will usually be taxed at capital gains rate.  With planning you can make sure that you are ready for the impact.

3. Beware of the risks of ownership

Owning Employee Stock Options may carry additional risks, especially as you get more of them. As Wealth Strategists we recommend that you should not concentrate too much of your wealth in a single stock. As an employee you are already exposed to the risk of your employer: you work there and you depend on your employer for your income. You need to evaluate how much more of that risk you can afford. If in addition to having employee options you also own stock in your employer either directly or in the company 401k, we need to talk!

Of course employee stock options need to vest before you can do anything about them. However, when they vest you can mitigate the concentration risk by diversifying or selling a portion in the most tax efficient manner, then reallocating the proceeds to other investments.

4. Harvest your gains

The optimal time to exercise employee stock options and sell them, is soon after they vest, with allowance added for the tax differences. According to Options Pricing Theory, beloved of MBAs, gains can be maximized by postponing exercise until shortly before expiration. In practice, a bird in the hand is worth two in the bush: you never know when the next market downturn is coming.

5. Plan for Re-investment

Two pressing problems at exercise time are: 1) where to get the money to pay the taxes, and 2) what to do with the proceeds.

One example of a way to handle can be to balance the additional income from stock options with a temporary increase in 401k or IRA contributions. The additional 401k contribution reduces your taxable income, as well as your cash flow. That is balanced by the increase in taxable income and cash flow that comes from the exercised options or sold stock.

In that way your tax level may remain at equivalent levels. And you will have stored away the gain.

Option wealth comes with many complex issues to consider. However, it is an exciting opportunity for you and your family to build or fortify a nest egg and further secure your financial future. As Wealth Managers our primary goal is to help you plan strategically to maximize the value of this unique opportunity.

(a version of this post appeared on boston.com).