Can I use my SARSEP funds to purchase and hold my stock options?

August 18, 2000

Date:   Sat, 22 Jul 2000
From:   Fitz


I read the question titled “Can I defer taxes by exercising my stock options directly into an IRA?” and am hoping it doesn’t really apply to my situation. I have stock options with a pre-IPO company. I also have a self-directed (i.e., I can buy any stock, bonds, mutual funds, etc.) SARSEP. I would like to exercise my options using funds in the SARSEP so that the stock will be held in the SARSEP. That way when I sell the stock the full amount of the proceeds (still within the SARSEP and tax-deferred) can continue to grow.

Is this possible? If not, are there any mechanisms whereby I could accomplish the same thing?




Date:   28 Jul 2000

Hello Fitz,

A retirement plan is considered to be a separate taxpayer from the person whose account it holds.

If you have an ISO, the right to exercise the option is not transferable.

If you have an NQO, you have to look at the option. If you can transfer it and when the retirement plan exercises the option, any ordinary income will be taxable to you.

If you transfer stock received from exercising an ISO to a retirement plan, it is considered a disposition of the stock, which would result in your recognizing ordinary income.

Since you are in a pre-IPO situation, it may be your ordinary income exposure isn’t very great.

Bear in mind that by holding the stock in a retirement plan, you may be forfeiting the ability to have the gain taxed at long-term capital gains rates.

In any case, you should seek legal counsel in pursuing such a sensitive plan. There could also be plan administration issues when a retirement plan holds employer stock.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

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