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Outearned Your Financial Strategy?
3 NEW Opportunities & 2 Expensive Time Bombs
Has your income suddenly become more complex? Gone are the days of a straightforward salary, plus bonuses and maybe commissions.
To get where you are, you’ve taken on more responsibility and achieved higher-level decision-making abilities. And now you need to do the same when it comes to your earnings.
Feel like you’re cautiously walking through a minefield of acronyms when you’re reviewing your options?
ISOs, ESOPs, RSUs, NQSOs, SERPs, plus deferred comp, vesting, perquisites, 10b5-1 plans… the list goes on.
You may or may not be familiar with everything in your compensation package. Either way, you know you need to capitalize on it.
Right now, you’re not entirely sure what the ideal strategy is.
If your relationship with your benefits package was a social media status, it would say "it's complicated.” Sure, you have the smarts to figure it out yourself. But you’ve got more urgent tasks to deal with, and you really don’t think you have that kind of time anymore.
In terms of money and career, you’re on a more advanced level now. Before you leveled-up, your financial life might have been simple enough that you didn’t need advice. Or maybe you relied on your friend from college who now works in finance to give you some ideas or look over your choices. You might have even asked for guidance from another colleague who seemed pretty savvy about the company benefits.
When it comes to complex compensation, what’s right for someone else isn’t necessarily right for you. You want to know that you’re making wise decisions with your money. You’ve outgrown your prior title and compensation structure, and in the process, you may have outgrown your money mavens, too.
You potentially have the ability to stash away serious cash for your family and your retirement. But what are the hot opportunities that come with your new benefits, and how do you develop a solid strategy for your own personal situation?
If you’re not sure how to capitalize on your new capital complexity, you're in the right place.
This quick read is designed to help you uncover the benefits of your executive compensation, and what potential landmines may be lurking below the surface. Find out what you need to know and the questions you need to ask to prevent the unexpected from blowing up in your face.
Right now, you may be asking yourself questions like these:
- How do I maximize the promise of the benefits I now have access to?
- What are the tax advantages and disadvantages of all my choices?
- What don’t I know about my package?
- What happens if I don’t make the right decisions in time?
- Do I have a compensation professional already in my corner?
If these questions resonated with you, keep reading...
Searching for the optimal way to profit from your new wages and benefits package?
Book your FREE customized Compensation Opportunities Session today.
Red Hot Opportunity #1:
Tax Deferral
To paraphrase George Carlin, Uncle Sam loves you, and he needs your money. High earnings tend to come with higher tax brackets and higher tax payments.
You’re probably already stashing as much as you can in tax-deferred retirement accounts. However, some of your new benefits may provide you with some additional tax deferral on top of the standard retirement plan.
When it comes to stock options and Restricted Stock Units (RSUs), the key benefit is that your compensation can be shifted into long-term capital gains once you sell the stock you’ve acquired through the plan, as long as you meet certain requirements.
Instead of earnings from W-2 or 1099 income that’s taxed at your marginal rate in the year you receive it, this portion of your compensation may be taxed at the much lower capital gains rate, as long as you satisfy the conditions.
The specifics of taxation depend on whether you’re granted Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs) or RSUs.1 Note that depending on which you receive, there may be an income element when your options or RSUs vest.
Deferred compensation allows you to defer a portion (or all) of your earned income in retirement, when your tax bracket is lower.
Critical questions to ask about tax deferral include:
- What are the tax implications of all the steps involved with stock options and RSUs?
- Do I understand the risk in setting aside a portion of my income in a plan that’s not protected by regulations?
- Is there any benefit to incurring a small level of tax now?
- Have I asked a financial professional what the most tax-efficient choice is for me?
Red Hot Opportunity #2:
Distinctive Exits: Retirement Plans Beyond the 401(k)
At your rung on the company ladder, you've likely been contributing the maximum to your employer's retirement plan. Maybe you've been trying to find additional ways to build up your nest egg for your later years.
When appropriate, deferred compensation and SERPs (Supplemental Employee Retirement Plans) can offer advantages. However, there are many details to get right and potential risks to consider. For example, unlike your 401(k) plan, they're not protected by ERISA or other governmental regulations.
Critical questions to ask about additional retirement possibilities include:
- Can I go beyond my 401(k)?
- Do I understand the risk in setting aside a portion of my income in a plan that’s not protected by regulations?
- What is the effect on my current financial situation if I choose to defer more money from my paycheck?
- What happens if my company goes through an acquisition or liquidity event?
- Have I discussed with a financial professional the risk/reward tradeoff for these advanced exit plans?
Red Hot Opportunity #3:
Controlling Your Cash Flow
By shifting some of your compensation to stock shares and for later in retirement, you determine how much income you bring in at your marginal tax rate each year. If there’s a year in which you expect a significant cash event (house sale, inheritance, etc.), you may elect to defer more compensation to later years, or take more equity options instead of salary.
Your employer might also offer some executive perquisites, in addition to the formal alphabet soup arrangements. These fringe benefits, such as company-issued vehicles, insurance offerings, club memberships, and educational reimbursement, can lower your cost of living while you’re working for the company.
Critical questions to ask about your income include:
- Are the fringe benefits fully paid for by my employer?
- What perks do I have access to at my current level, and will that change if I continue with the company?
- Are there any tax issues that I need to be aware of?
- Have I discussed how an adjustable income flow could affect my financial strategy with a financial professional?
Searching for the optimal way to profit from your new wages and benefits package?
Book your FREE customized Compensation Opportunities Session today.
Time Bomb #1:
Tax Analysis Paralysis
The tax aspects of executive compensation can be tricky, especially if you’re not used to dealing with them. Unfortunately, getting them wrong could explode in an expensive tax bill.
When done right, company shares can be turned into income that’s taxed at the lower long-term capital gains rate. But when not done right, you could end up being taxed at your marginal income rate instead. Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs) operate differently and require separate strategies to make sure that you ultimately achieve your goal of long-term capital gains taxes.
Also make sure you understand what perks are taxable in any given year (and what other factors you need to consider). When it comes to income tax, surprises are usually a bad thing! Especially when you’re in a high tax bracket.
Critical questions to ask about the timing of taxes include:
- Do I understand the tax timing of each part of my compensation?
- Is it better to exercise some choices now, rather than wait until later?
- Have I properly assessed the relative importance of all the factors I need to consider?
- Have I talked about the impact of timing with a financial professional?
Time Bomb #2:
Missing Out
What happens if you don’t take advantage of the perks that you’ve been given? Most of these benefits have very specific dates for when you have access to the privileges (vesting) and how long you have until they expire.
Equity plans often issue new grants every year, which makes it easy for recipients to lose track of what’s available and when. You don’t want to lose out on a profitable opportunity because some of your benefits have expired.
On the other hand, if you stay on top of your grants, you’ll be accumulating shares. At some point you may even need to sell some equity just to diversify your portfolio.
But if you’re considered an insider, a Rule 10b5-1 plan may be necessary. If you don’t already have one in place, you might not be able to sell your company shares.
Critical questions to ask about potential omissions include:
- Do I have anything with a timeline I need to keep track of?
- If so, what is my strategy to avoid allowing any benefits to expire worthless?
- Do I need a Rule 10b5-1 plan, and if I don’t need one now, will I in the future?
- Have I discussed my strategy with a financial professional to avoid missing out on benefits?
Find the Highest and Best Use of Your Complex Compensation (And Time)
At work, you prioritize your activities to get the most important tasks done first. You fill up your jar with the big, important rocks first and worry about the pebbles later. Why wouldn’t you want to do the same for your finances?
Making the wrong choices with your new pay package could result in higher taxes than necessary, and a smaller nest egg than you would have had otherwise. It’s critical to make smart decisions in a timely manner so you don’t end up leaving any money on the table.
Once you start playing in the big league, matters get very complicated, very fast. Strategies and teammates that worked in smaller arenas may no longer be a good fit. You need experienced coaches who can give you good advice on the transition. The solution you seek is specific to your personal circumstances.
The sooner you get clarity on exactly which benefits are available and the relevant timelines, the faster you can build a solid strategy for your personal situation. We have the experience to help guide you through the complex landmines. Book your FREE customized Compensation Opportunities Session today so you can get started on maximizing your income.
We’ll help you determine if there are things you don’t know, and clarify the consequences of taking one action as opposed to another. We’re professionals in helping high earners like you uncover and leverage the benefits that fit their personal scenarios.
You’ve already made a smart investment by taking the time to read through the guide. Make the next wise move by calling or emailing us now to set up your complimentary Compensation Opportunities Session.
Goran Ognjenovic
Independent Investment Advisors
(971) 350-8068
info@independentadvisorsnw.com
https://independentadvisorsnw.com