Understanding Equity Compensation

Employers do what they can to foster a sense of ownership in their employees. After all, if you stand to benefit from a company’s success, you’re more likely to do a great job for them, or so the logic goes.

So, when you are hired for a job or promoted within your existing company, you might be offered some sort of ownership benefit. You might even get to decide whether to take all of your pay in cash or to use some of your pay to purchase equity in the company.

At first glance, the answer might seem simple: Show me the money! However, there are situations in which an equity position may make more financial sense. Finding that line is key to getting the most compensation from your career.

What do you need to know, then, to ask the right questions?

In some cases, employees have the choice to buy company stock in a tax-deferred retirement plan sponsored by their employer, the most common of which is the 401(k). In other instances, there may be other ways to buy into ownership.

Why is a retirement plan choice important? Well, the point of these retirement accounts is that you’re not paying tax on money today but rather at some point in the future when you take a distribution. If you are taking a distribution from the sale of stocks in your 401(k), you may have the choice of treating the appreciated securities as ordinary income or using the net unrealized appreciation (NUA) tax treatment.

It’s critical to point out that the NUA choice only works when you buy stocks that are kept in your workplace retirement account. The NUA election isn’t available for other types of accounts.

With an NUA, when you take this type of in-kind distribution (payment in the form of securities rather than cash), the rules are complex. So keep in mind that this article is providing a high-level overview and is not a replacement for real-life advice regarding assets held in your retirement account. You should consult a tax professional with an understanding of distribution rules before modifying or adjusting a distribution strategy.

There are several benefits to using an NUA with a distribution. For example, when securities are sold, any NUA is taxed at a long-term capital gains rate, which may be lower than an ordinary income tax rate. So, an NUA approach may help you manage your tax bill.¹

However, there are limitations, too. The NUA decision must be weighed against the potential market risk of holding a single stock upon distribution.¹

Once you reach age 73, you must begin taking required minimum distributions (RMD s) from your 401(k) or any other defined contribution plans in most circumstances. Withdrawals from your 401(k) or any other defined contribution plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10 percent federal income tax penalty.

Each of these scenarios might feel complicated, or even confusing, but there’s good news. You have a financial professional in your corner who may be able to offer insights into your overall compensation strategy. Their assistance may be key in helping you make decisions about whether to add equity to your retirement assets.

1. Ameriprise.com, 2023.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

The Five Basics of Financial Literacy

Credit and debt

Understanding the ways credit and debt work for and against you are some of the first steps toward understanding personal finance. While it’s not useful to be scared of credit and debt and avoid it entirely, there are some things to look out for.

Debt

Debt is like any tool: when used correctly, it can be quite useful. When used incorrectly, debt can easily spiral out of control. Missing payments may negatively affect your credit score, and that can take years to recover from. Missed payments, for example, can stay on your credit report for seven years.1

Credit Score

Your credit score is one of the factors lenders use to judge your trustworthiness and qualification for mortgages, auto loans, and other lending. Landlords and employers may also check your credit before renting to you or offering you a job.

Interest

Interest can work against you, but it can work for you, too. When you take out a loan with an interest rate, it’s working against you, but when you invest early and take advantage of compound interest, it’s working for you.

Compound Interest

When you’ve got an account that’s accruing interest, the interest earned gets added to the principal. Then, interest is earned on the new, larger principal, and the cycle repeats. That’s compound interest, baby!

The Value of Time

It’s never too early to start saving. In fact, the earlier you start, the better your result. By getting started with retirement savings sooner rather than later, you can leverage the value of time to your advantage.

Cindy vs. Charlie

Consider the case of Cindy and Charlie, who will each invest a total of $100,000. Cindy starts right away, depositing $10,000 a year at a hypothetical 6% rate of return. After 10 years, Cindy stops making deposits. Charlie, on the other hand, waits 10 years before starting to invest. He also puts $10,000 a year away for 10 years, at the same hypothetical rate as Cindy. After 20 years, who has more money? Shockingly, Cindy’s balance is nearly twice as big as Charlie’s, thanks to the extra time her investment returns had to compound.2

Inflation

Inflation has the potential to eat away the purchasing power of your money. That means, with inflation, the dollar you earn today may not be worth a dollar in the future. Here some things to keep in mind when thinking about inflation.

Cash in a Mattress

Keeping all your cash under a mattress is not only unsafe, it literally costs you money. Assuming the rate of inflation is a hypothetical 2%, every dollar you squirrel away will shrink in value to just $.98 next year.

Rate of Return

Because inflation erodes the purchasing power of your money, any returns you earn on your accounts may not be the “real” rate of return. If your account earned a hypothetical 6% rate of return over the last year, but inflation was 1.5%, your real rate of return was 4.5%.3

identity theft and safety

In the modern world, identity theft is one of the biggest threats to financial and personal safety. A cracked password or misplaced Social Security number can have big consequences on your current and future finances.

Consider using a password manager

The common wisdom is to use a unique password for each site and service you use. A password manager can make this easier by generating and storing strong passwords until you need to use them.

Want to share?

Sources

1. Experian, 2023
2. This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance or specific investment advice. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate. The types of securities and strategies illustrated may not be suitable for everyone.
3. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.

Catch-Up Contributions

A recent survey found that 28% of workers are very confident about having enough money to live comfortably through their retirement years. At the same time, 27% are not confident.¹

In 2001 congress passed a law that can help older workers make up for lost time. But few may understand how this generous offer can add up over time.²

The “catch-up” provision allows workers who are over age 50 to make contributions to their qualified retirement plans in excess of the limits imposed on younger workers.

How It Works

Contributions to a traditional 401(k) plan are limited to $22,500 in 2023. Those who are over age 50 – or who reach age 50 before the end of the year – may be eligible to set aside up to $30,000 in 2023.³

Setting aside an extra $7,500 each year into a tax-deferred retirement account has the potential to make a big difference in the eventual balance of the account, and by extension, in the eventual income the account may generate. (See accompanying chart.)

Catch-Up Contributions and the Bottom Line

This chart traces the hypothetical balances of two 401(k) plans. The blue line traces a 401(k) account into which $22,500 annual contributions are made each year. The red line traces a 401(k) account into which an additional $7,500 in contributions are made each year, for a total of $30,000 in contributions a year.

Upon reaching retirement at age 67, both accounts begin making withdrawals of $7,000 a month.

The hypothetical account without catch-up contributions will be exhausted before its beneficiary reaches age 80. Keep in mind, the IRS regularly updates these maximum contribution limits.

This hypothetical example is used for comparison purposes and is not intended to represent the past or future performance of any investment. Fees and other expenses were not considered in the illustration. Actual returns may vary.

Both accounts assume an annual rate of return of 5%. The rate of return on investments will vary over time, particularly for longer-term investments.

In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

1. EBRI.org, 2022
   2. Economic Growth and Tax Relief Act of 2001
   3. IRS.gov, 2023. Catch-up contributions also are allowed for 403(b) and 457 plans. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Are You Prepared for an Estate Tax Sunset?

The federal estate tax threshold rose to $25.84 million in 2023 for married couples and $12.92 million for individuals, as part of the Tax Cuts and Jobs Act (TCJA). Like several TCJA provisions, the higher estate tax limit is due to sunset in 2025. Barring congressional action, the exemption amount will return to about $6.8 million, adjusted for inflation, in 2026. Similarly, the current 40% maximum gift and estate tax rate will increase to 45%.¹

For high-net worth individuals, this could influence wealth transfer strategies. Although this sunset is coming, the good news is that it’s still a few years away.

And there’s more good news: your financial professional can help you with your estate strategy, regardless of whether Congress decides to maintain the current threshold. Now may be an excellent time to get together and start thinking about your post-2025 strategy. I look forward to your call.

1. USBank.com, 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Draining The Lifeblood Of The Economy

In the final days of 2022, Congress passed a new set of retirement rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

The law is called SECURE 2.0, and it’s a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019.

The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, I broke the major provisions of the new law into four sections.

New Distribution Rules

RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). And starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.¹

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.²

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.³

New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.⁴

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.⁵

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.⁶

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, employers can roll a 529 education savings plan into a Roth IRA. So if your child gets a scholarship, goes to a less expensive school, or doesn’t go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are allowed under certain other circumstances, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.⁷

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.⁸

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 401(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.⁹

More Highlights

Support for Small Businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.¹⁰

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.¹¹

Remember that just because retirement rules have changed does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It’s not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.