I have a home equity loan- ~$42K at 7.5% and about $10K in credit card debt at 16%+. I have several hundred thousand dollars in vested stock options from my company (part of my long term incentive plan). I also have about $80K in stocks in my Fidelity account. Does it make more sense to cash in the options or sell shares from my fidelity account to pay off the debt? The options are in a very favorable position right now (3M). The tax consequences of selling the options versus selling my shares is what has me stuck. Which one is a better idea or how do I figure this out?

  • The two answers below are reasonable, but we would need to know your annual income to give you a certain answer. – NL - Apologize to Monica Nov 13 '14 at 15:13
  • My estimated taxable income this year should be about $200K (file married - joint). – Kowalski Nov 13 '14 at 21:30

The key phrase in your post is that the options are "in a good position now". They may be worthless in three months or a year.

If I was you I would cash in the options and pay off the debt. Cash in enough to also cover taxes. You may want to cash them all in.

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  • Thank you for your reply. I get your point about the options value versus later. Good point! My estimated taxable income this year should be about $200K (file married - joint). I think I may need to sell about $70K+ in options value to net ~$45K to $50K after tax. Part of my concern is that the option proceeds would be treated as income and it would shift my tax bracket increasing my burden on my normal income. Does this make sense? – Kowalski Nov 13 '14 at 21:29
  • I understand your concern and congratulations on doing so well. The options proceeds will be taxed at 33% and probably part of your income. If 50K was needed I would sell off 75K of my options, your math is spot on. That's what I would do. While it may be seem inefficient tax wise, you will reap the tangible and intangible benefits of being debt free. You can easily build wealth with you future income as it will not be "nerfed" by interest payments to the bank. – Pete B. Nov 14 '14 at 13:55
  • Pete, thank you so much for the great advice. It is very much appreciated. I'll most likely head in that direction now. Best regards! – Kowalski Nov 14 '14 at 20:01
  • Keep us posted! – Pete B. Nov 15 '14 at 2:49
  • You can also look at paying off debt as having a guaranteed return of 7.5% on $42k and 16% on $10k. I've never seen guaranteed returns with percentages that high before. – Sun Dec 8 '14 at 20:34

The most tax efficient way to get some cash would be to sell some stocks from the Fidelity account that have the lowest capital gains. The tax will typically be 15% of the capital gains. This will be a one-time cost which should save you money compared to paying 7.5% on the loan year after year.

Tax on selling the stock options will probably be higher, since you imply there would be high capital gains, and some of the proceeds might even be taxed as income, not capital gains.

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  • Thank you for the reply. It makes sense. Yes, the options would be taxed as income. My estimated taxable income this year should be about $200K (file married - joint). – Kowalski Nov 13 '14 at 21:26

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