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Lesson 5. Incentive Stock Options > Tax Consequences of ISOs - Pg. 24

Incentive Stock Options 24 Incentive stock options allow employers to structure compensation for key employees that can be tailored to each worker. It is not unusual for each key employee to have his own ISO plan structured to meet his needs. This gives ISOs an advantage over traditional compensation plans, such as qualified retirement plans, which must be made available to all employees and may have strict restrictions on partici- pation by highly paid executives. Plain English Qualified retirement plans qualified retirement plans are authorized by the tax code and allow money to be saved with no taxes due until withdrawals begin, usually at age 65. Pension plans, 401(k) plans, and individual retirement accounts (IRAs) are examples of qualified retirement plans. Companies can also structure an ISO so that the employee puts his money at risk when exercising or the company can set up financing plans that help the employee pay for exercising the ISOs. Along with these benefits, ISOs carry the traditional benefits associated with employee stock op- tions. The executive has unlimited potential gain and minimal tax liability if the company is suc- cessful. It is easy to see why ISOs are so popular. Employers find them particularly helpful in recruiting and retaining top talent. Cash-starved startups, particularly in the high-tech industries, use ISOs to attract and retain executives they could not afford with cash compensation only. Tax Consequences of ISOs ISOs, if they are handled correctly, are very attractive to highly paid employees. Employees have