Episode 116: What Do I Do After I Max out my 401k with Ariel Ward
Ariel Ward, CFP® joined Workable Wealth in 2018 as a Financial Planner and in March of 2019, made the move to Abacus Wealth Partners with me as a Financial Planner. She and I work closely together on our clients. She has 11 years of experience in the field of personal financial services and in helping clients develop financial clarity. She is passionate about helping professionals understand their financial lives and make better decisions with their money. She enjoys working with clients in the aviation industry to make the most of their employee benefits and map out a plan for personal financial strength. She is a member of NAPFA, the XY Planning Network and the Financial Planners Association.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
Options to save after you’ve maxed out your 401k
401k limits for singles and married couples
The definition of a backdoor Roth IRA and some considerations around it
Income limitations for Roth IRA
What you should have set up before doing a backdoor Roth IRA
Why you should work with a financial planner if interested in the backdoor Roth
Tax considerations when utilizing the backdoor Roth IRA
When to begin contributing to a 529 Plan and how much
What to look for when investing in a taxable account
What capital gains taxes will look like based on income and time
How to take advantage of a Health Savings Account (HSA)
Some ages to keep in mind if you are utilizing an HSA
How you should prioritize your savings goals
GET SOCIAL WITH ARIEL AND LET HER KNOW YOU HEARD ABOUT HER HERE
Episode 108: How to Invest Intentionally with Lindsey Woodward
This week I sat down with Lindsey Woodward, CFP® to talk about how to align your money with your values by investing intentionally.
Lindsey is a financial advisor at Abacus Wealth Partners, which provides fee-only, comprehensive financial advice to help individuals, families and foundations. Lindsey is dedicated to helping the people she works with align their money with their goals and values. She serves on the Abacus Wealth Partners Investment Committee and is a co-leader of the Los Angeles chapter of WISE (Women Investing for a Sustainable Economy).
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
What is meant by “values informed” investing
Where to get started with investing intentionally
How Environmental, Social and Governance (ESG) play a role in investing
The reason a portfolio is screened
Comparing and contrasting divestment, investment and engagement
How to engage with companies you own shares in
Tools for you when investing intentionally
Different platforms and portfolios you can invest intentionally
Action items to increase ESG options within your 401k
What to consider when using your brokerage accounts with ESG portfolios
The different types of holdings you should have in your portfolio
The biggest benefit of investment diversification
How to align your money with your values if you don’t have money to invest right now
How you can bank responsibly through a Community Development Financial Institution (CDFI)
How micro-loans play in an overall financial strategy
Episode 107: Navigating Your Employee Stock Options with Laura Morganelli
This week I sat down with Laura Morganelli, CFP® to talk about how to handle employee stock options and some of the things to be aware of if and when you decide to exercise those options.
Laura joined Abacus Wealth Partners in 2015. With over 7 years of experience in personal finance, her main goal is to bring a sense of peace in people’s financial lives. She recognizes that financial planning and investment management topics can sometimes feel complex and scary and is passionate about providing guidance and education in simple, human, and enjoyable ways. Laura lives in Philadelphia. When she is not nerding out over Excel spreadsheets or burying her nose in a book, she can be found at the dog park with her pup, Bella, working out, enjoying happy hour and trying new restaurants with friends, or traveling to new cities.
Family is also important to her, considering their influence is a big part of who she is today. As a child her parents often told her “If you love what you do, you’ll never work a day in your life.” Those words have stuck with her over the years. Her eagerness to build knowledge, coupled with her love of meeting new people, has made financial planning the perfect fit.
HERE’S WHAT YOU’LL LEARN FROM THIS EPISODE:
What stock options are and what you can or can’t do with them
Exercise price, stock price, vesting dates, grant dates, and more explained
What exercising your stock options looks like
Different avenues for exercising your shares
The role taxes play upon exercising your options
What a spread is and how it can impact your taxes and compensation
The difference between non-qualified and incentive stock options
Capital gains tax considerations
Considerations for holding versus selling options
A common misconception to be aware of
The benefits of being awarded stock options and how they can enhance your life
What to be cautious of regarding expiration dates
GET SOCIAL WITH LAURA AND LET HER KNOW YOU HEARD ABOUT HER HERE
Moving jobs can come with many changes: cleaning out your desk, onboarding and learning a role at your new employer, and adjusting to a different team and office environment. One thing people don’t always think about is what to do with all the money accrued in their 401(k).
After all, it is your money! Having a game plan is critical.
In general, you have three options:
Keep the money where it is
Cash it out (except don’t do that unless you want up to half of the value taken away by taxes)
Roll the funds over into a different account, usually your new company’s 401(k) or an IRA
A 401(k) rollover can be a beneficial strategy to maximize your money while still keeping it safe to grow and yield returns. So what’s a 401(k) rollover, how does it work, and which account makes the most sense to store your assets?
Let’s find out.
What Is a 401(k) Rollover?
A 401(k) rollover is a process where you transfer funds from one 401(k) provider into another tax-advantaged retirement account. This process gives you the opportunity to take your money with you from job to job.
Did you know that on average people will change jobs 12 times throughout their career? That would be a lot of open 401(k) accounts if you never transfer your plan when you move. 401(k) rollovers can also be beneficial for keeping track of your accounts and encouraging active participation in your retirement savings.
How a 401(k) Rollover Works
A 401(k) rollover allows you to transfer money in your old employer account into a new tax-advantaged retirement account (such as a new 401(k) or an IRA). You can do this in two ways: through an indirect or direct transfer.
An indirect transfer is slightly more complicated than a direct transfer in that the money passes through more hands before it ends up in your new account.
With an indirect transfer, you notify both your new plan administrator (401(k) or IRA that you want to start a rollover, and you let your old 401(k) provider know that you want to empty your account. Your old provider will mail you a check to you personally as the employee. You then must deposit the check into your new IRA account within 60 days in order to avoid owing full taxes on the distribution plus penalties.
Under IRS rules, your old employer is typically required to withhold 20% of your account balance in case you don’t deposit the money in your new account within 60 days.
After you deposit your first check, you’ll then need to make out another one to cover the 20% initially withheld (or else this could be deemed a distribution). That means you’ll need to have enough in a savings or other account to replace that 20%. When all is said and done, you will get that 20% back at tax time should you meet the 60-day deadline.
While totally do-able, this process requires you to put in more work, fork over the additional 20% balance, and keep track of deadlines and changing hands. Plus you’re limited to one indirect rollover in a 12 month period. It is often much smoother to go ahead with a direct transfer.
A direct transfer is much more, well, direct. With this process, you still notify your new provider that a rollover is initiated, and let your old provider know you want to roll the funds over into your new plan.
What’s different is that your old provider will either mail or electronically deliver a check directly to your new plan provider, and it’s automatically deposited for you. This option is much more straightforward, and ensures that you won’t owe additional taxes assuming that the transfer is done with equal accounts, for example, a traditional to a traditional or a Roth to a Roth.
Important Rules to Know About 401(k) Rollovers
As with most things in life, there are a set of rules that you should know before you initiate a 401(k) rollover. The most important being the 60-day rule.
In the case of a 401(k) rollover, 60 is the magic number. When you begin a transfer, you have 60 days to transfer the funds into your new account. Should you miss that deadline, you will be faced with massive tax consequences. Bypassing the 60-day limit triggers the IRS to think that you simply cashed the funds, which will all be counted toward your ordinary income.
There are some notable exceptions to this rule. In 2016, the IRS created a list of 11 reasons why you can be late to make the transfer including a lost check, severe home damage, or a death or illness in the family.
Handling Company Stock
If your old 401(k) held stock from your previous company, it’s important to know that by transferring to an IRA, you will miss out on tax benefits. Your new 401(k) asset allocation will be determined by your employer which means that they probably wouldn’t allow you to retain stock in your old company. Be sure to work with a tax professional to navigate this situation and come up with a plan that makes the most sense for you depending on how much stock you owned in your old company and what a full transfer might mean for your tax bill.
Why Do a 401(k) Rollover?
Sometimes it makes sense to leave your money in your old employer’s 401(k) plan. In fact, if you have over $5,000 in the account, your employer has to give you the option to keep the money in the account.
More likely than not, while you were working for them, they were also paying for the administrative fees associated with the account upkeep. They may no longer be willing to do that, even if you keep your money in their plan.
If you have anywhere from $1,000-$5,000 in your account, your employer is legally obligated to send you a letter and document in writing the options that you have. It is then up to you to inform them what you want to do. If you choose not to respond, they can roll the money over to an IRA on your behalf which is called an involuntary cash-out.
For accounts with $1,000 or less, many employers will write you a check. Just be sure to deposit that check in a new 401(k) or IRA within 60 days to avoid the tax penalty.
What Accounts Can You Roll the Money Into?
Now that you know what a 401(k) rollover is, understand how it is done, and the rules to keep in mind, it’s time to take a look at the specific accounts you can use to give your retirement savings a new home.
Today, we are going to look at two options, transferring the money into your new 401(k) or moving it into an IRA.
Rollover Into a New 401(k)
Your new 401(k) is an excellent option for your rollover. The 2020 contribution limit is $19,500 or $26,000 for those over 50. The good news? Your rollover won’t count toward that contribution limit.
Take some time to evaluate your new company’s 401(k) policy. Are you happy with your investment choices? Is there enough diversity in the type of investment options you have? Does the company offer a competitive match program? Understanding what you will get from the new employer should be an important factor in deciding if you want to roll the money over.
If you have an incredible employer match and good investment opportunities, rolling it over into this new account might make a lot of sense for you. 401(k) accounts are also generally quite safe from creditors and lawsuits, providing extra protection than the looser lines of an IRA.
Another important factor is the required minimum distributions (RMDs) in retirement. Your 401(k) will have you take your RMDs once you turn 72, thanks to the SECURE Act. You will need to pay ordinary income tax on those distributions, so be sure to factor that into your tax plan.
Rollover Into an IRA
An Individual Retirement Account (IRA) is another great choice for investors to consider. In general IRAs have more flexibility and customization in your investment choices which can allow you to allocate your money as you see fit. 401(k) accounts are often quite stringent and strict with how you diversify your investments but an IRA gives you more flexibility and freedom in that department.
An IRA can also help you consolidate your financial picture and give you a better sense of where you are in your financial journey. Having multiple accounts can get tricky to forecast where you really are and how close you are to reaching your savings goals.
You also have more flexibility on what fees you pay with an IRA. Since you can decide where you want to open your account, you have more control over the type and amount of fees that you pay. With a 401(k) you have little control over administrative and other fees since the program is set up through your employer.
IRAs also have more wiggle room when it comes to distributions. The government will allow you to take money out of your IRA early without penalty for things like college costs and that can’t happen with a 401(k).
You will still need to factor in distribution requirements. A Traditional IRA operates in the same way as the 401(k), where all distributions are taxed at your ordinary-income rate. Whereas a Roth IRA doesn’t have taxes upon distribution since the money contributed is after-tax.
The Bottom Line
401(k) rollovers are an excellent strategy for you to bring your money with you as you change jobs and advance in your career. It is important to know the options that you have in order to make the best decision for you and your financial future.
Are you ready to initiate a 401(k) rollover but want to talk through your specific situation? Give us a call today.
Stock options are a popular way for organizations to compensate their employees. They’re a convenient and cost-effective way to provide added value for the work that you do. Stock options also provide an incentive for employees to continue doing high-quality work for the company, because they tie a portion of your compensation to the company’s success. If the company does well, and the stock value rises, you’re in a good spot!
Unfortunately, stock options aren’t as cut and dry as other types of benefits or employee compensation. Your W2 income, for example, is taxed at your regular income tax rate. You withhold taxes with each paycheck and file your return every April. There’s never a question of whether your paycheck will show up, when you’ll have access to the funds, or how they’ll be taxed.
Stock options aren’t distributed or taxed with the same level of consistency. Although stock options can be a big financial benefit, it’s important that you understand how they work, and when to exercise them, to make the most of them.
What Are Employee Stock Options?
Employee stock options are exactly what they sound like – they’re an option that’s available to you to purchase a certain amount of company stock for a set price within a specific time frame. The price that your company offers the stock options to you is called the grant price. However, you won’t have the option to exercise your newly issued stock options immediately after you’re hired.
Companies like to create more incentive for you to stick around and keep working with them, so they may set your stock options to “vest” (or become available for exercise) after a set period of time. Once your stock options vest, you’ll have a set period of time to exercise them before they expire.
Many people want to exercise their options right away to create a windfall for themselves – like a cash bonus. While this may be the right move in some cases, it’s important to weigh your options before going through the exercise process.
4 Considerations Before Exercising
There are a few things to consider before exercising your stock options:
2. What type of taxes can you expect after exercising? When you exercise your ISOs, you don’t create a taxable event. So, you could feasibly hold onto the exercised options for a while, and pay long-term capital gains tax rates in a year or longer. NQSOs are counted as taxable income when you exercise, and you’ll still owe capital gains taxes when you sell them later.
3. Will the options gain more value if you delay selling exercising? It’s important to note that there are no guarantees when it comes to market performance or the performance of your employer in general. While in some cases your stock options may continue to grow in value while your grant price stays the same, the decision on whether you delay exercising until your expiration date is ultimately a conversation to have with your financial planner.
4. How will you use the profits from exercising your shares? It’s important to have a plan for the sudden influx of cash you’ll receive. After you set aside funds for the taxes you’ll owe on the sale of your shares, how will you use the money left over? Usually, it’s wise to have a specific goal in mind.
The last thing you want is for the money to “disappear” with odds and ends expenses when it could have made a large and focused impact on your financial life. Consider using the funds to boost your emergency savings, knock out a large portion of your debt, or contribute to a big financial goal (like education savings for your kids, or purchasing a home).
You want to make sure you’re getting the most value out of your employee stock options. Having a strategy in place can set you up for long-term success.
Stock Option Exercise in Practice
Let’s take a quick look at a stock option exercise example to give you an idea of what you might be able to expect, and to put some of these terms and definitions into practice:
Your company has offered you the right to purchase 2,000 stock options at $20.00/share. You have until January 1, 2025 to purchase.
You decide to sit on the stock option for a while until your company’s stock reaches $35.00/share on August 1, 2020, which is when you decide to exercise your options.
Navigating your stock options isn’t always easy. In fact, many employees are so overwhelmed by the process that they either wait until the last minute to exercise, or they exercise without having a strategy for holding or selling their shares.
It’s important to walk into stock option decisions with your eyes wide open. Taxes around stock options can be complicated, and you don’t want to find yourself in a situation where you owe notably more than you had estimated when you exercised your options or sold them for a profit.