Wealth Management for sPACEx employees

The EP Wealth Advisors team has planning experience in all facets of complex equity and cash compensation, including working with many SpaceX clients.

A Pathway From Where You Are to Where You Want to Go

SpaceX employees are busy in their careers, and often have not had the time to consider and plan for their own financial success. EP Wealth Advisors can help orchestrate a strategy that considers every facet of your financial picture, including your ESPP, RSUs, ISOs, NQSOs, 401(k), retirement plans from past employers – and importantly – what this all means for your taxes, retirement, and estate plan.

SpaceX compensation structure is both generous and complex, which creates unique financial planning opportunities

  • Annual Merit Letter – options are often presented that need careful consideration, do you take your Long Term Incentive as cash, RSU, or ISO?

  • Kickass Award – Not just a great name, these awards grant stock bonuses that introduce a separate and unique vesting schedule.

  • Employee Stock Purchase Plan (ESPP) allows employees to purchase company stock at 15% discount to the market price.
  • Restricted Stock Units (RSUs) – SpaceX employees may have different vesting schedules for their RSU grants, typically a 3-year or 5-year vesting schedule.

  • Incentive Stock Option (ISO)ISOs give employees the right to purchase company stock at a predetermined price, offering potential for significant gain. Typically a 6-year vesting period.

  • Non-Qualified Stock Option – NQSOs are similar to ISOs in that they give employees the right to purchase company stock at a predetermined price, however, NQSOs are subject to different tax rules under U.S. tax law, which can affect your immediate tax liabilities. Typically a 6-year vesting period.

Vesting Schedules: Based on our SpaceX clients, we have seen two different vesting schedules:

  • 3 YR Vest – A one-year waiting period from the Grant Date, followed by annual vesting over the next two years.
  • 5 YR Vest – A one-year waiting period from the Grant Date, followed by semi-annual vesting over the next four years.

Tax Implications:

  • Ordinary Income Tax at Vest: RSUs are considered as W-2 income and are usually taxed as part of regular payroll cycle. The taxable income is based on the fair market value at the time they vest. This means the amount included in your income for tax purposes is determined by the market price of the shares when they become fully available to you.
  • Capital Gains Tax: Any subsequent gain or loss after the shares have vested is taxed as either short-term or long-term capital gains, depending on the holding period. Shares held for more than one-year after vest are subject to the lower long-term capital gains tax rates.

Tax Payment Options: Upon the vesting of your RSUs, you generally have two options for handling the tax liability:

  1. Share Withholding: You may elect to have the company withhold a portion of your shares to cover the tax obligations. This is a straightforward method, as it doesn't require you to provide cash up front.
  2. Cash Payment: Alternatively, you can pay the tax liability with cash. This option might be preferable if you wish to retain the full number of shares and are prepared to cover the taxes from other resources.

Vesting Schedules: Like RSUs, ISOs typically come with vesting schedules that govern when the options can be exercised. Based on our SpaceX clients, we have also seen two different vesting schedules:

  • 6 YR Vest – A two-year waiting period from the Grant Date, followed by monthly vesting over the next four years.
  • 6 YR Vest – A one-year waiting period from the Grant Date, followed by monthly vesting over the next five years.

Tax Implications:

  • No Ordinary Income Tax at Exercise: Unlike RSUs, ISOs are generally not taxed as ordinary income at the time of exercise although if the shares are held beyond the calendar year of exercise, they may be subject to the Alternative Minimum Tax.
  • The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that individuals pay at least a minimum amount of tax. AMT calculations differ from regular income tax calculations and if the AMT is higher, you pay that amount instead. Exercising Incentive Stock Options (ISOs) may trigger AMT if the market price at the time of exercise is higher than the exercise price. This can lead to taxation on unrealized gains, as exercising ISOs doesn't provide immediate cash income. At EPWA, we provide comprehensive financial planning, including strategies specifically tailored to effectively mitigate potential AMT liabilities.
  • Capital Gains Tax: If ISOs are held for more than one-year post-exercise and two years post the initial grant date (qualifying disposition), any profit made on the sale of the stock is taxed as long-term capital gains, which is usually lower than ordinary income tax rates. Selling shares before meeting these conditions results in disqualifying dispositions, taxed as ordinary income.

Planning considerations: ISO Reporting – SpaceX employees will receive Form 3921 (Exercise of an Incentive Stock Option Under Section 422(b)). This form reports on the number of shares that were exercised during the tax year including reporting on the grant date, exercise date as well as the potential AMT adjustment related to the ISO exercise. It’s recommended that this form be viewed in conjunction with form 1099-B, which outlines shares sold during the year to ensure that ISO tax treatment is reported accurately on your tax return.  

We have seen several cases in which the disposition of ISOs was erroneously reported on a client’s tax return. With EPWA’s knowledge and understanding of SpaceX reporting documents we have been able to save clients tax dollars through tax return amendments. In our experience it is important that your tax preparer is proficient in executive compensation reporting.

Purchase Periods:

  • Based on our SpaceX clients, we have seen that the purchase periods last 6 months and generally begin on April 16th and October 16th. This is the period when deductions from your paycheck will begin accumulating to purchase the shares. After six months of the purchase period beginning, the shares will be bought with your after-tax deductions.

Tax Implications:

  • Tax Treatment at Purchase: The discount on the purchase price is not taxed at the time of purchase if certain holding period requirements are met. However, if shares are sold before meeting the qualifying period, the discount is taxed as ordinary income.
  • Qualifying Dispositions: If shares are held for at least one year after the purchase date and two years after the beginning of the offering period, any gain beyond the discount is taxed as long-term capital gains, which are subject to lower tax rates than ordinary income.
  • Disqualifying Dispositions: If shares are sold before these periods, any gains are treated as ordinary income, which could result in higher tax liabilities.

Vesting Schedules: Non-Qualified Stock Options also come with vesting schedules, similar to ISOs and RSUs, which dictate when the options can be exercised. Based on our experience with SpaceX clients, we have seen one vesting schedule:

  • 6 YR Vest  A two-year waiting period from the Grant Date, followed by monthly vesting over the next four years.

Tax Implications:

  • Ordinary Income Tax at Exercise: Unlike ISOs, the exercise of NQSOs results in immediate W-2 income included in your regular payroll cycle. The income is calculated as the difference between the stock's market price at exercise and the exercise price. At EPWA, we can help with deciding when to exercise NQSOs in conjunction with your overall strategy for your SpaceX equity compensation plan, and your overall income tax situation.

Capital Gains Tax: Any subsequent gain or loss after the exercise is taxed as either short-term or long-term capital gains, depending on the holding period of the stock. Stocks held for more than one-year post-exercise are subject to the lower long-term capital gains tax rates

RSU (Restricted Stock Units) 

Vesting Schedules: Based on our SpaceX clients, we have seen two different vesting schedules:

  • 3 YR Vest – A one-year waiting period from the Grant Date, followed by annual vesting over the next two years.
  • 5 YR Vest – A one-year waiting period from the Grant Date, followed by semi-annual vesting over the next four years.

 

 

Tax Implications:

  • Ordinary Income Tax at Vest: RSUs are considered as W-2 income and are usually taxed as part of regular payroll cycle. The taxable income is based on the fair market value at the time they vest. This means the amount included in your income for tax purposes is determined by the market price of the shares when they become fully available to you.
  • Capital Gains Tax: Any subsequent gain or loss after the shares have vested is taxed as either short-term or long-term capital gains, depending on the holding period. Shares held for more than one-year after vest are subject to the lower long-term capital gains tax rates.

 

 

Tax Payment Options: Upon the vesting of your RSUs, you generally have two options for handling the tax liability:

  1. Share Withholding: You may elect to have the company withhold a portion of your shares to cover the tax obligations. This is a straightforward method, as it doesn't require you to provide cash up front.
  2. Cash Payment: Alternatively, you can pay the tax liability with cash. This option might be preferable if you wish to retain the full number of shares and are prepared to cover the taxes from other resources.

 

ISO

Vesting Schedules: Like RSUs, ISOs typically come with vesting schedules that govern when the options can be exercised. Based on our SpaceX clients, we have also seen two different vesting schedules:

  • 6 YR Vest – A two-year waiting period from the Grant Date, followed by monthly vesting over the next four years.
  • 6 YR Vest – A one-year waiting period from the Grant Date, followed by monthly vesting over the next five years.

 

Tax Implications:

  • No Ordinary Income Tax at Exercise: Unlike RSUs, ISOs are generally not taxed as ordinary income at the time of exercise although if the shares are held beyond the calendar year of exercise, they may be subject to the Alternative Minimum Tax.
  • The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that individuals pay at least a minimum amount of tax. AMT calculations differ from regular income tax calculations and if the AMT is higher, you pay that amount instead. Exercising Incentive Stock Options (ISOs) may trigger AMT if the market price at the time of exercise is higher than the exercise price. This can lead to taxation on unrealized gains, as exercising ISOs doesn't provide immediate cash income. At EPWA, we provide comprehensive financial planning, including strategies specifically tailored to effectively mitigate potential AMT liabilities.
  • Capital Gains Tax: If ISOs are held for more than one-year post-exercise and two years post the initial grant date (qualifying disposition), any profit made on the sale of the stock is taxed as long-term capital gains, which is usually lower than ordinary income tax rates. Selling shares before meeting these conditions results in disqualifying dispositions, taxed as ordinary income.

 

Planning considerations: ISO Reporting – SpaceX employees will receive Form 3921 (Exercise of an Incentive Stock Option Under Section 422(b)). This form reports on the number of shares that were exercised during the tax year including reporting on the grant date, exercise date as well as the potential AMT adjustment related to the ISO exercise. It’s recommended that this form be viewed in conjunction with form 1099-B, which outlines shares sold during the year to ensure that ISO tax treatment is reported accurately on your tax return.  

We have seen several cases in which the disposition of ISOs was erroneously reported on a client’s tax return. With EPWA’s knowledge and understanding of SpaceX reporting documents we have been able to save clients tax dollars through tax return amendments. In our experience it is important that your tax preparer is proficient in executive compensation reporting.

 

ESPP

Purchase Periods:

  • Based on our SpaceX clients, we have seen that the purchase periods last 6 months and generally begin on April 16th and October 16th. This is the period when deductions from your paycheck will begin accumulating to purchase the shares. After six months of the purchase period beginning, the shares will be bought with your after-tax deductions.

Tax Implications:

  • Tax Treatment at Purchase: The discount on the purchase price is not taxed at the time of purchase if certain holding period requirements are met. However, if shares are sold before meeting the qualifying period, the discount is taxed as ordinary income.
  • Qualifying Dispositions: If shares are held for at least one year after the purchase date and two years after the beginning of the offering period, any gain beyond the discount is taxed as long-term capital gains, which are subject to lower tax rates than ordinary income.
  • Disqualifying Dispositions: If shares are sold before these periods, any gains are treated as ordinary income, which could result in higher tax liabilities.

 

NQSO

Vesting Schedules: Non-Qualified Stock Options also come with vesting schedules, similar to ISOs and RSUs, which dictate when the options can be exercised. Based on our experience with SpaceX clients, we have seen one vesting schedule:

  • 6 YR Vest A two-year waiting period from the Grant Date, followed by monthly vesting over the next four years.

Tax Implications:

  • Ordinary Income Tax at Exercise: Unlike ISOs, the exercise of NQSOs results in immediate W-2 income included in your regular payroll cycle. The income is calculated as the difference between the stock's market price at exercise and the exercise price. At EPWA, we can help with deciding when to exercise NQSOs in conjunction with your overall strategy for your SpaceX equity compensation plan, and your overall income tax situation.

Capital Gains Tax: Any subsequent gain or loss after the exercise is taxed as either short-term or long-term capital gains, depending on the holding period of the stock. Stocks held for more than one-year post-exercise are subject to the lower long-term capital gains tax rates

 

What it Means to Have a Wealth Team

A Team Dedicated to Your Goals

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Our clients are typically people who face complexity in their financial lives, who appreciate having investments, taxes, estate planning, trust, and financial planning all in one place – and delivered by a dedicated team. Every client has a dedicated Wealth Team led by their Advisor:

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Advisor

  • Your primary contact for all financial planning and investing needs
  • Understands your financial situation and goals
  • Ensures that all pieces of your plan work together
  • Works with you on plan updates as your needs change

 

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Financial Planner

  • A dedicated Certified Financial Planner who collaborates with your advisor, building a stress-tested plan to meet your life goals
  • Runs multiple cashflow projections to ensure all your plan will be successful
  • Creates action plans with specific, personalized recommendations
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Portfolio Manager

  • Transaction expert for specific plan needs such as tax efficiency, cash liquidity, or individual stock positions
  • Identifies potential risks to make necessary changes
  • Monitors market conditions to keep your portfolio aligned with your long-term goals
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Client Service

  • Your dedicated service representative for day-to-day support
  • Assists with request, technology, documents, scheduling, and more
  • Knows your communication preferences and support needs

Estate/Advanced Planning Team

  • A team of wealth experts for your long-term goals and legacy
  • Assess and review existing estate planning documents
  • Assist with complex estate planning topics
  • Plan and facilitate strategies for wealth transfer across generations

Tax Specialist 

  • A dedicated team of EAs and CPAs assisting with tax planning
  • Specialists responsible for tax preparation and compliance*
  • Assist with complex tax topics and research

Other Dedicated Specialists in the areas of:

  • Divorce Planning
  • Philanthropy Planning
  • College Planning
  • Executive Compensation
  • Real Estate Analysis
Contact An Advisor

Case Study

Avoiding the Pitfalls of Alternative Minimum Tax (AMT) with Incentive Stock Options

Our clients are typically people who face complexity in their financial lives, who appreciate having investments, taxes, estate planning, trust, and financial planning all in one place – and delivered by a dedicated team. Every client has a dedicated Wealth Team led by their Advisor:

  • Background: 

    Mike, a Director of Engineering at SpaceX, had been granted a substantial number of Incentive Stock Options (ISOs) as part of his compensation package. These options became highly valuable due to the company's successful expansion and innovation in aerospace technology.

  • Situation: 

    In an effort to capitalize on the increased stock value, Mike decided to exercise a significant portion of his ISOs in a single year. This decision was made without a comprehensive understanding of the potential tax implications, particularly concerning the Alternative Minimum Tax (AMT).

  • Issue: 

    When Mike exercised his ISOs, the substantial increase in paper income—represented by the difference between the exercise price and the fair market value of the shares at exercise—triggered a large AMT liability. This was because ISO exercises are a preference item for AMT purposes. Unfortunately, Mike was not prepared for this impact, and the high AMT bill substantially reduced his financial gains from the exercise of his stock options.

  • Outcome: 

    Mike faced an unexpected financial strain due to the AMT bill, affecting his overall investment strategy and financial stability. This scenario led to a significant cash outflow that could have been mitigated with better tax planning.

    How EPWA Could Have Helped:

    At EP Wealth Advisors, we specialize in tax planning strategies for clients with complex compensation packages, including ISOs. If Mike had been our client, we could have assisted him in several ways:

    • Strategic Planning: We would have developed a multi-year plan for the exercise of ISOs, spreading out the exercises to keep the income under the AMT threshold and managing the tax impact over several years.
    • AMT Forecasting: By projecting Mike’s AMT for future years, we could have identified optimal times for exercising options to potentially minimize or eliminate AMT liabilities.
    • Cash Flow Management: Understanding the liquidity needs and tax implications, we could have advised Mike on setting aside sufficient funds or exploring other financial strategies to cover potential tax liabilities.
    • Regular Monitoring: Continuous monitoring of tax law changes and stock market performance to adjust the strategy as needed to optimize potential tax outcomes.

     

Conclusion: 

Guidance and strategic planning are crucial when dealing with complex financial instruments like ISOs. At EPWA, we do our best to advise clients like Mike and help maximize their equity compensation while potentially minimizing tax liabilities, including those associated with AMT.

Case Study

Avoiding the Pitfalls of Alternative Minimum Tax (AMT) with Incentive Stock Options (ISOs)

Our clients are typically people who face complexity in their financial lives, who appreciate having investments, taxes, estate planning, trust, and financial planning all in one place – and delivered by a dedicated team. Every client has a dedicated Wealth Team led by their Advisor:

Mike, a Director of Engineering at SpaceX, had been granted a substantial number of Incentive Stock Options (ISOs) as part of his compensation package. These options became highly valuable due to the company's successful expansion and innovation in aerospace technology.

In an effort to capitalize on the increased stock value, Mike decided to exercise a significant portion of his ISOs in a single year. This decision was made without a comprehensive understanding of the potential tax implications, particularly concerning the Alternative Minimum Tax (AMT).

When Mike exercised his ISOs, the substantial increase in paper income—represented by the difference between the exercise price and the fair market value of the shares at exercise—triggered a large AMT liability. This was because ISO exercises are a preference item for AMT purposes. Unfortunately, Mike was not prepared for this impact, and the high AMT bill substantially reduced his financial gains from the exercise of his stock options.

Mike faced an unexpected financial strain due to the AMT bill, affecting his overall investment strategy and financial stability. This scenario led to a significant cash outflow that could have been mitigated with better tax planning.

Guidance and strategic planning are crucial when dealing with complex financial instruments like ISOs. At EPWA, we do our best to advise clients like Mike and help maximize their equity compensation while potentially minimizing tax liabilities, including those associated with AMT.

At EP Wealth Advisors, we specialize in tax planning strategies for clients with complex compensation packages, including ISOs. If Mike had been our client, we could have assisted him in several ways:

  • Strategic Planning: We would have developed a multi-year plan for the exercise of ISOs, spreading out the exercises to keep the income under the AMT threshold and managing the tax impact over several years.
  • AMT Forecasting: By projecting Mike’s AMT for future years, we could have identified optimal times for exercising options to potentially minimize or eliminate AMT liabilities.
  • Cash Flow Management: Understanding the liquidity needs and tax implications, we could have advised Mike on setting aside sufficient funds or exploring other financial strategies to cover potential tax liabilities.
  • Regular Monitoring: Continuous monitoring of tax law changes and stock market performance to adjust the strategy as needed to optimize potential tax outcomes.
Contact An Advisor

Learn more about EP Wealth and how we can help

We are looking forward to hearing from you about your goals.

DISCLOSURES

  • EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
  • Hiring a qualified advisor and/or financial planner does not guarantee investment success and does not ensure that client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct t or implied results of projections being represented here will be met or sustained.
  • Information presented is general in nature and should be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the reding of personalized investment advice or is intended to supplement professions individualized advice.
  • The content of this report is believed to be accurate as of the date of publication and cannot and does not accurately forecast future economic, market, or financial conditions; including changes to retirement benefits, social security, and/or Medicare. For this reason, any subsequent changes, and/or that occur after the publication of this presentation may cause the analysis encompassed herein to become inaccurate. Any references to future market or economic forecasts are based on hypothetical assumptions that may never come to pass.
  • Please consult with a CPA, tax professional, and/or attorney regarding your specific situation before implementing any of the strategies referenced directly or indirectly herein.
  • The free financial health assessment referenced here is limited to, and can only be provided to, individuals with $500,000 or more in investable assets. The health assessment is limited to an initial call or meeting with an Investment Adviser Representative (IAR) of EP Wealth to discuss and assess your current financial situation and a subsequent follow-up meeting or call to share our thoughts. No additional services will be provided. EP Wealth Advisors’ obligation is limited to extending an offer to provide these services. It is the responsibility of the individual requesting the free health assessment to accept the service offered. No guarantee or warranty can be made that any of the information discussed or relayed in these meetings will be suitable or relevant. The free financial health assessment is limited in nature and is not intended to be regarded as an attempt to provide comprehensive financial advice.
  • The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors will satisfy your financial service requirements. Services offered by other advisors may align more to your specific needs.
  • All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
  • EP Wealth Advisors, LLC. Is registered as an investment advisor with the SEC and only transacts business in state in where is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the commission, nor does it indicate that the advisor has attained a particular level of sill or ability.

 

HOW TO CREATE OR UPDATE YOUR FINANCIAL PLAN

Annual financial planning creates a snapshot of where you are financially at this moment in time. Once you have a clearer picture of what’s coming in and what’s going out, you’ll be able to set goals for enjoying the fruits of your labor, while also setting aside enough to cover emergencies and future endeavors like starting a business, retiring, or making a substantial charitable donation. EP Wealth is prepared to help you every step of the way, from gathering the information you will need, to crafting a plan focused on your personal priorities.

Have recent life changes made it necessary to update your financial plan? Connect with a financial advisor at EP Wealth to discuss which strategic adjustments make the most sense for your personal goals.

WHY USE A FINANCIAL ADVISOR?

6 Reasons to Work With a CERTIFIED FINANCIAL PLANNER

A CERTIFIED FINANCIAL PLANNER (CFP) has the education and experience necessary to help you create a comprehensive financial plan. Every CFP at EP Wealth must:

  • Passed an exam that covers insurance, investing, taxes, retirement, and estate planning
  • Passed a background check, which includes mandatory disclosure of any felonies or bankruptcies
  • Commit to the Board's code of ethics and rules of conduct that puts client interests first
  • Accrue at least 6,000 hours (or 3 years), or 4,000 hours (~2 years) of apprenticeship experience performing financial planning services
  • Complete 30 hours of continuing education credits (including 2 hours of ethics coursework) every 2 years

To summarize: you should choose to work with a Certified Financial Planner for their education, certifications, accountability, experience, and commitment to ongoing learning. Choosing a CFP as your personal financial advisor gives you a holistic view of your finances that takes every aspect of your life into consideration, ensuring that every facet of your financial strategy works together harmoniously to get you where you’d like to be.

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