Navigating Your LTI Incentive Elections at J&J

Johnson & Johnson typically offers a variety of LTIs, each with its distinct tax implications. Stock options, for instance, give you the right to purchase shares at a predetermined price. The difference between the market price and the exercise price, known as the “spread,” may be subject to income tax when the option is exercised.

Restricted stock units (RSUs) are another common form of LTI. These are company shares granted to you but subject to certain restrictions, typically vesting over time. Unlike stock options, RSUs may result in taxation when they vest, not when you sell the stock.

It’s crucial to understand the specific tax consequences of each type of LTI award, as these can significantly impact your long-term financial planning.

Navigating your LTI elections isn’t solely about understanding the types of incentives available or the strategies for optimization; it’s also crucial to be well-versed with the vesting schedule attached to your incentives. The vesting schedule outlines the time frame within which these stock options or RSUs become yours to exercise or sell. Not all LTIs vest at the same time or in the same manner. Some might have a “cliff” vesting schedule, where a bulk of the options become available after a specific period, while others might use a “graded” or “ratable” vesting that allows a percentage to vest periodically over several years. Understanding the vesting schedule helps you prepare financially for when these assets are available and aids in tax planning. Ignorance in this area could lead to missed opportunities, including the loss of incentives if you leave the company before a certain vesting date or the inability to maximize your LTIs’ value effectively.

When it comes to optimizing your LTI elections at Johnson & Johnson, there are several strategies you can employ, each with its own set of considerations. Timing is often a crucial factor, especially when dealing with stock options. The ideal moment for exercising these options can depend on a variety of elements such as market conditions, your personal financial situation, and the prevailing tax landscape. You might consider a “laddering” approach, where you exercise options incrementally over several years to spread out the tax liability and diversify your investment risk.

Another key strategy is tax-loss harvesting, which involves selling underperforming investments to offset the taxes on gains you might realize from your LTIs. This tactic is particularly useful if you have significant unrealized gains and are concerned about the potential tax burden.

Diversification is yet another critical strategy. When your LTIs, such as RSUs or stock options, vest, you’ll find yourself owning a large chunk of J&J stock. While loyalty to your company is admirable, having too much of your portfolio tied to any single stock exposes you to heightened risk. Consider selling a portion of the vested LTIs and reinvesting in a diversified portfolio to better spread that risk.

In addition to these, strategic timing related to changes in tax laws can also offer benefits. For example, if tax rates are expected to rise in the near future, you may decide to exercise options earlier to lock in current lower rates. On the flip side, if rates are expected to decrease, deferring exercise could be advantageous.

Navigating your LTI incentives while also juggling other investment and retirement accounts can be daunting. At Cerity Partners, our financial advisors are equipped with the expertise and tools to guide you through this complex landscape. We offer tailored advice and ongoing portfolio management to help you maximize the benefits of your LTI package while aligning with your overall financial goals.