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My wife has a 401k which is invested in her company's stock and in mutual funds (only choices). She also has options, some restricted and being held, some not matured; and some unrestricted, quite a bit of which are exercisable.

We are trying to decide how to allocate her portfolio going forward.

If she exercised her options, and along with the restricted shares that matured and are being held, and with the company stock already in the 401k, that makes up 73% of her portfolio, and the mutual funds 27%.

That seems to be too many eggs placed in one basket.

We have thought about exercising some of the options and using the proceeds to exercise and buy the rest and hold them. Or, could sell the company stock in the 401k and move it to the mutual funds which would make the ratio 56%/44%.

Any ideas?
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We have thought about exercising some of the options and using the proceeds to exercise and buy the rest and hold them. Or, could sell the company stock in the 401k and move it to the mutual funds which would make the ratio 56%/44%.

If you exercise options outside a qualified retirement plan, you will be responsible for the taxes on the full sale price, not to mention transaction fees. My guess is that in your 401k the company stock is actually a share of a company stock fund, unless you receive proxy statements the month before the annual meeting. If so, then you can sell shares of the stock fund and buy shares in another mutual fund without any transaction fees or tax consequences, since you will not be taxed on the value of your account until retirement distribution.

Fuskie
Who aggress that too many eggs in one basket is a rotten thing...
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Any ideas?

Meet with a CPA/CFP to help you.

buzman
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never exercise options and keep the stock.

More than never if 70% of your assets are in the company stock!....a recipe for disaster.

no one should have more than 20% of their net worth in a company stock. Diversify.

WCOM, ENRON, and dozens of others should send warning bells. no company is immune. Don't bet your retirement on one company....some nut could blow up the HQ building and take the company down the tubes in 30 seconds...... or another insider ENRON fiasto or WCOM fiasco.

Diversify.

Now!

t.
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That seems to be too many eggs placed in one basket

Agreed! One of the basic rules of 401K'ing is to minimize your holdings of company stock.

The thinking here is that if the company gets into financial trouble you may be out of a job while at the same time your 401K is becoming worthless.

The technical term financial experts use for this is "double whammy!" ;-)

Just my 2¢

Andy
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never exercise options and keep the stock.

In many cases, I would not consider exercising and holding, but I disagree that one should never do it.

Here is how I decide…

A big factor is whether the options are NSO or ISO. You should talk to a tax guru to get all the details, but in general, on ISO options, if you hold them a year the entire gain over the strike price is taxable as a capital gain. But on NSO options, the on paper gain the day you exercise is taxed as ordinary income no matter how long you hold it (if you hold a year, and it goes up more, that additional increase is a capital gain). To me, NSO options aren't worth the risk of exercising and holding, but ISO sometimes are.

Another factor is how much of my money is tied up (and at risk) if I hold. The lower the strike price, the greater the potential tax savings relative to the amount of my money at risk.

Another factor is how much company stock you already have. In my case, none of my 401k is in company stock. The only time I own any is during the few days between when ESPP shares are granted and I sell them, or when I am holding exercised options. With how much company stock you already have, I personally would not exercise and hold any of your options until your exposure is drastically reduced.

I have some ISO options at ~20% of the current price, which I have in the past exercised and held for a year.
I have some NSO options at ~40% of the current price, which I will sell immediately when I exercise.
I have some NSO options at ~97% of the current price, which I will sell immediately when I exercise.

Just my $.02.

-Joe
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One of the big 'gotchas' turns out to be greed.

People have a pile of options, which they could exercise. They see the stock price climbing, and figure they'd rather have a bigger profit, and pay tax on that, instead of gradually selling some options each year, and reducing their exposure to company stock to less than 20% of net worth...so they sit and sit on the options...

Then 2001 happens, and ALL of the options, and 80% of their net worth vaporizes in 3 days...... an ENRON, bio-tech, computer firm that falls on hard times, dot.com, WCOM, or accounting firm that had a scandal, etc...... IBM fell 75% in a few years....GE is half of what it was at the peak.....

SO greed keeps you from selling, and reducing exposure.....and worse yet is holding the stock, since you'd paid for it, and now it is real money at risk.

Options can be 'real money'. It is not real and diversified money till it is money in the bank, or money invested in something else...other than company stock.

I had options at one time....I didn't sell any of them along the way.....I left the company and had to sell them. The stock was still going up..year after year...but I had no choice....... also had some other stock, which I sold part of. The company was WCOM. Turned out it was at the peak.....a year later, the stock was worth 1/64th of what I sold it for. If I had stayed at the company, I would have taken a bath. I had friends who lost a million bucks on options they didn't exercise..knew it was going to 'come back'. Greed tends to make one make foolish decisions (or avoid making any).

t.
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Another factor is how much of my money is tied up (and at risk) if I hold. The lower the strike price, the greater the potential tax savings relative to the amount of my money at risk.

This is definitely something to talk to a CPA about, though. My understanding is that this method will often subject you to AMT, and the savings won't be as big as they first appear.

Zanne
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My understanding is that this method will often subject you to AMT, and the savings won't be as big as they first appear.

Very true!

AMT is a concern any time options are exercised. And it is certainly easier and safer to exercise and sell.

But every investment involves risk. I think there are some cases where after careful analysis, exercising and holding is worth the risk.

-Joe
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