The company I’ve been at for the last few years (A) has recently been acquired by a much larger public company (B). I was one of the earlier employees, so am anticipating a fairly significant windfall, about $3M pre-tax if all the options/RSUs are cashed out once the deal closes in a couple of months. I have already read the windfall wiki and understand the importance of not rushing things. I am working on this with my CPA, but I wanted to ask for help on some decisions that could affect the outcome and tax burden, so I understand them well myself.
I’ll start with my current financial profile and put the questions I have below that.
Annual income (2016): $205K
Emergency funds: enough to cover 3-4 months of expenses
Debt: $566K remaining on a mortgage (5/1 ARM, 2.75% interest with 2 years until the first adjustment), house worth about $835K according to Zillow/Redfin
Credit cards are paid off every month (no persistent debt)
Tax Filing Status: Single
Tax Rate: 33% federal, 9.3% state
State of Residence: CA
Desired Asset allocation: 70% stocks / 30% bonds (flexible on this)
Desired International allocation: 30-40% of stocks (including EM)
Approximate size of the total invested portfolio is $300K.
Taxable at ETrade
18.5% Apple (AAPL)
18.4% Facebook (FB)
10.1% American Airlines (AAL)
1.1% Amazon (AMZN)
0.6% AT&T (T)
5.7% Vanguard Total Intl Stock Index Admiral (VTIAX) - 0.12%
7.5% Vanguard Small Cap Index Admiral (VSMAX) - 0.08%
7.5% Vanguard 500 Index Admiral (VFIAX) - 0.05%
Rollover IRA at Vanguard
7.9% Vanguard FTSE Emerging Markets ETF (VWO) - 0.15%
4.8% Vanguard REIT Index ETF (VNQ) - 0.12%
4.6% Vanguard Total Stock Market ETF (VTI) - 0.05%
2.4% Vanguard FTSE Developed Markets ETF (VEA) - 0.09%
1.2% Vanguard 500 Index Fund Investor Class (VFINX) - 0.17%
Roth IRA at Scottrade
2.8% Vanguard Total International Bond ETF (BNDX) - 0.12%
2.6% Schwab US Aggregate Bond ETF (SCHZ) - 0.05%
1.2% Vanguard FTSE Emerging Markets ETF (VWO) - 0.15%
$18,000 to company 401k (no company match)
Funds available in 401k
T. Rowe Price Retirement Income R (RRTIX) - 1.07%
T. Rowe Price Retirement 2010 R (RRTAX) - 1.10%
T. Rowe Price Retirement 2020 R (RRTBX) - 1.19%
T. Rowe Price Retirement 2030 R (RRTCX) - 1.25%
T. Rowe Price Retirement 2040 R (RRTDX) - 1.28%
T. Rowe Price Retirement 2050 R (RRTFX) - 1.28%
AllianzGI NFJ International Value Instl (ANJIX) - 0.93%
American Funds EuroPacific Gr R4 (REREX) - 0.85%
Mutual Global Discovery Fund A (TEDIX) - 1.32%
Oppenheimer Developing Markets Y (ODVYX) - 1.05%
Vanguard Emerging Mkts Stock Idx Admiral (VEMAX) - 0.15%
Vanguard Total Intl Stock Index Admiral (VTIAX) - 0.12%
Virtus Foreign Opportunities A (JVIAX) - 1.45%
Vanguard REIT Index Admiral (VGSLX) - 0.12%
T. Rowe Price New Horizon (PRNHX) - 0.80%
Vanguard Small Cap Index Admiral (VSMAX) - 0.08%
Janus Enterprise S (JGRTX) - 0.93%
Vanguard Mid Cap Index Fund Admiral (VIMAX) - 0.08%
Victory Established Value A (VETAX) - 1.06%
BlackRock Equity Dividend A (MDDVX) - 1.00%
Fidelity Contrafund (FCNTX) - 0.74%
Vanguard 500 Index Admiral (VFIAX) - 0.05%
BlackRock High Yield Bond BlackRock K (BRHYX) - 0.54%
Metropolitan West Total Return Bond M (MWTRX) - 0.67%
Vanguard Inflation-Protected Secs Adm (VAIPX) - 0.10%
- It’s unlikely I will stay at company B after the payout. I am hoping to invest the proceeds into a short term portfolio and take 4-6 months off to travel and figure out what I want to do in the future, i.e. go back into tech, consulting, etc. What kind of things should I look at to get some fixed income and safety – short-term bonds, T-bills, something else?
- Should I keep Rollover IRA or transfer money to 401k while I’m still employed? It interferes with my ability to do Backdoor Roth conversions, but if I my income is going to be lower than Roth limit next year, that might not matter?
- The structure of the deal is such that the exercised options will be paid in cash and the unexercised options will turn into company B options that can be exercised after the deal closes. All options are ISOs. 60% of the options were exercised more than a year ago, so I’m expecting LTCG on them. The other 40% is what I am wondering about. I can either exercise them now, so that they turn into cash as well, but then it’s ordinary income, or exercise them after the closing and hold onto them for a year and a day in order to get LTCG treatment. Of course, company B stock may go down in the meantime wiping out tax savings, and also, not sure whether I would be subject to AMT.
- What would be the most tax-effective way to prepay taxes, assuming 2018 income will be much lower? It is likely that I will spend the rest of 2017 and possibly majority of 2018 abroad.
- Should I look at paying off my mortgage? It’s a significant chunk of the windfall. The monthly expenses so far are about $3700 for mortgage, property taxes and HOA fees.
- Once the money comes in, should I split it into several FDIC insured accounts or transfer to TD/Schwab or some other brokerage that could give me a transfer bonus or something?
- I’d like to start transitioning the stocks in my taxable account to a fund portfolio, but they have quite a few accumulated cap gains. What strategy do you suggest for doing that?