Top Strategies for Managing Incentive Stock Options

Top Strategies for Managing Incentive Stock Options

Incentive stock options, or ISOs, are a pretty common way for companies to compensate management and key employees.  Otherwise known as “statutory” or “qualified” options, ISOs are a way to give management a stake in the company’s performance without doling out a bunch of cash.

While they can have wonderful tax benefits, far too many people who own ISOs fail to exercise them wisely.  Some estimates even claim that up to 10% of in the money ISOs expire worthless every single year.  If you own incentive stock options but aren’t sure how to manage them, read on.  This post will cover a few of the top management strategies at your disposal.

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Turbotax vs Accountant: When Should You Hire a CPA?

Turbotax vs. Accountant: When Should You Hire a CPA?

Let me start by saying that I’m a big fan of most tax preparation software.  Taxes are a cost in and of themselves.  Any way to automate the prep and filing process in a compliant and inexpensive way is A-OK in my book.

But even though they’re easy to use, Turbotax and others are still software programs that have limitations just like any other robot.  When your financial picture becomes sufficiently complicated, spending the extra cash to hire a professional can actually save you money in the long run.  Here’s my take on when you should ditch the software for an experienced professional.

 

What You Should Know About Tax Prep Software

When people talk about tax in general, there are really two sides to the conversation: tax planning and tax compliance.

Tax planning is essentially planning transactions before they happen, and making thoughtful decisions that will minimize the total amount of tax you owe.  Tax compliance, on the other hand, has to do with preparing your return, filling out forms, and reporting on transactions that have already occurred.

While tax prep software is great and all, it’s really only useful for tax compliance.  The more complicated your financial profile becomes, the more decisions you’ll have to make, and the more important tax planning will become.

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Mutual Funds Capital Gains Distributions: What They Are & How to Avoid the Tax Hit

Mutual Fund Capital Gains Distributions: What They Are & How to Avoid the Tax Hit

If you’ve ever invested in a mutual fund, you may know that they’re required to distribute at least 95% of their capital gains to investors each year.  You may also know from experience that these gains are not always welcome since they come with a tax liability attached.

More often than not these capital gains are not large enough to cause investors to stir.  But every year there are a few funds that pass massive unwanted gains on to investors, leaving them with a big, stinky tax bill.

This post may be slightly tardy given that some mutual fund families have already distributed their year end capital gains.  Nevertheless, it’s an important topic that you should be aware of and keep an eye out for.

If your objective is to minimize your tax bill (hint: it probably should be) you’ll want to know about upcoming distributions at the end of each year, and avoid them when it makes sense.  This post will cover exactly what capital gains distributions are, why mutual funds distribute them, and when and how you might want to avoid them.

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401(k)s, IRAs & Tax Deferred vs. Tax Exempt Investing

401(k)’s, IRAs & Tax Deferred vs. Tax Exempt Investing

Should I contribute to a traditional or a Roth IRA?

This is a big question I get asked fairly frequently.  And really, the conversation expands beyond individual retirement accounts.  The decision whether to invest on a tax deferred or tax exempt basis is one you’ll likely make many times over your investing career.  Some people prefer a exempt account to “get taxes out of the way”, while others prefer to defer taxes as long as possible in order to “let their money work for them”.

In this post we’ll explore the topic and discuss which situations may be best for either strategy.  But first, let’s review exactly what tax deferred and tax exempt investing actually are.

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Case Study Retiring with $1,000,000

Case Study: Retiring With $1,000,000

Those of you who know me know that I’m a massive baseball fan.  And when it comes famous baseball quotes, most come from one player: Yogi Berra.

Yogi Berra was a long time catcher for the Yankees, and had an incredible hall of fame career.  He was equally known for his head-scratching quotes, which the world has affectionately termed “Yogi-isms.”

Yogi didn’t comment often on financial topics, but when I think about retirement planning one of his famous quotes stands out:

“A nickel ain’t worth a dime anymore.”

When we think about retirement planning, $1,000,000 is often considered a kind of “golden threshold.”  Many people think of a million dollars as the minimum nest egg they’ll need in order to retire comfortably.  But as Yogi pointed out, being a millionaire doesn’t amount to what it used to.

So is it even possible to retire with $1,000,000 these days?

Let’s find out.  In this post we’ll explore a hypothetical couple named John and Jane.  They’ve saved $1,000,000 and want to retire, which is a common situation for many Americans.

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6 Ways to Minimize Required Minimum Distributions

6 Ways to Minimize Required Minimum Distributions

There’s a plethora of tax advantaged retirement accounts out there today.  Enough that the acronyms and numbers can get really confusing…

  • IRA
  • 401k
  • 403b
  • 457
  • Profit sharing
  • SEP IRA
  • SIMPLE IRA

Just to name a few – trust me, there are more.  The reason?  The government wants us to save for our own retirement.  And by offering an array of tax advantaged accounts, they’re incentivizing us to put money away.

But while the tax advantages are great, the government won’t let us shelter our money from taxes forever.  When you turn 70 1/2, they’ll force you start taking withdrawals called required minimum distributions, or RMDs.  If you don’t you’ll be subject to a hefty 50% penalty.

This poses quite a problem for many retirees, since each withdrawal raises their tax liability for the year.  So for those of you who want to keep Uncle Sam’s grimy mitts off of your hard earned retirement funds, here are six ways to minimize your RMDs:

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401k RMD Rules

401k RMD Rules: A Comprehensive Guide

You’re probably familiar with the term “required minimum distributions” (or RMDs for short).  They’re the systematic withdrawals that the IRS makes you take out of an IRA after you turn 70 1/2.  But what about for 401k and other qualified retirement plans?  What are the 401k RMD rules?

While they largely resemble IRA RMD rules, 401k plans have a few subtle but important differences.  And since many people these days are staying at their jobs beyond 70 1/2, it’s a situation that more and more people find themselves in.

To help you navigate the waters, here’s a comprehensive guide to 401k RMD rules, which also applies to 403b, 457, and other qualified plans.

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IRA Contributions After 70.5

IRA Contributions After 70.5…Can You? Should You?

Recently I had a client in his mid-60s ask me how much longer he’d be allowed to contribute to his IRA.  My client was approaching retirement, but wasn’t planning on drawing from the account until he absolutely needed to.

Since he had other financial resources to draw income from his plan was to let the account grow for as long as possible, thereby delaying tax on the gains.  This meant contributing the maximum amount to his account each year, and only withdrawing funds when forced to by required minimum distributions.

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5 Times a Roth 401k Conversion is a Good Idea

5 Times a Roth 401k Conversion is a Good Idea

Roth IRAs have become one of the most popular ways to build retirement savings over the years.  In fact, they’re so popular that thousands of people clamor every tax season to convert their traditional IRAs to Roth IRAs.

This conversion is one of the most popular financial planning moves, since it can reduce your tax burden and eliminates required minimum distributions (RMDs).

More recently, a new form of Roth account has emerged: Roth 401k plans.  Roth 401k plans are essentially the same alternative to traditional 401k plans that Roth IRAs are to traditional IRAs.  Contributions are made after tax, and gains and withdrawals are tax free.

And with Roth 401k plans on the scene, many sponsors are starting to allow their participants to convert their traditional, pretax 401k balances into Roth, after tax balances.  This transition is known as a Roth 401k conversion.

Roth 401k conversions are not unlike Roth IRA conversions.  The transition will create taxable income, but your assets will never leave your employer’s 401k plan.

Here’s how one might work:

  • Johnny has a $100,000 saved up in his employer’s 401k plan.  He didn’t pay any income tax on his contributions, and they will continue to grow tax free until he starts taking withdrawals.
  • When he starts taking withdrawals after age 59 1/2, he’ll owe income tax on every dollar he takes out of his account.
  • If Johnny were to convert his 401k contribution to Roth contributions, he would owe income tax on the entire $100,000 this year.  His account would continue to grow tax free as it would have otherwise.
  • But, when he begins taking withdrawals down the road, they won’t be taxable income to Johnny.  Essentially, he would be paying his tax burden now instead of later.

Conversions can be appealing.  You pay taxes on the account now, rather than in the future when you might be in a higher bracket.  But the decision is not always so cut and dry.  And since this is a question I get in my practice from time to time, I thought it’d help to share 5 circumstances where a Roth 401k conversion is a good idea.

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The Ultimate 7 Step Checklist for Hiring a Financial Advisor

The Ultimate 7 Step Checklist For Hiring a Financial Advisor

A few years back, I had a friend approach me at a BBQ.  He had some questions about how his financial advisor was managing his accounts.

 

Friend: “Yeah, I just don’t know if this guy is doing the right thing for me.  We talk every now and then, he seems like a nice guy, but my portfolio hasn’t really gone anywhere.

Plus, every time we chat he has some brand new investment idea he tries to sell me on.  And every single time, he talks up his new idea like it’s the Michael Jordan of portfolio management.  (My friend is a big NBA fan).  His ideas sound good….I’m just not sure I’m in the right situation.  I feel like there’s more going on behind the scenes that I don’t see, but I don’t know what questions to ask.”

Me: “Well how did you find him?”

Friend: “A coworker recommended him.  Said the guy made him a ton of money a few years ago.”

Me: “How are you paying him?”

Friend: “Well, I’m not really sure.  Everything gets wrapped through the account somehow.”

Me: “OK.  Let’s take a step back.  Maybe it’d help to identify what you’re looking for in an advisor.  If you were starting fresh, what would you like an advisor to help you with?”

Friend:  “Hmmm.  I guess manage my money and help it grow, make sure I’m on track for retirement, and make sure I don’t run out of money after I stop working.”

Me: “So if you were starting from scratch, what qualities would you look for in an advisor?  What criteria would you use?”

Friend:  “I really have no idea.  I’ve never thought of it that way.  Plus there’s about a million financial advisors around here, I get information overload.  I guess I’d go with someone I know and like, and seems to have a good reputation.  What should I be looking for?”

I had to think about my friend’s question for 10 seconds or so.  At the time, I was working at Charles Schwab, but strongly considering starting my own firm.

Me: “I think if I were looking for an advisor, I’d try to find someone who’s competent, trustworthy, unbiased, enjoyable, and looks after for my finances for a fair and transparent price.”

Friend: “Whoa whoa whoa.  Slow down with the laundry list.  That’s a whole lot of stuff I don’t understand.  It sounds GOOD though.  I need to tend the grill, but let’s reconvene in a few minutes.”

Coincidentally, this was one of the very reasons I was considering starting my own firm.  There are about 300,000 professionals in the U.S. today who call themselves “financial advisors” or “financial planners.”  But in my opinion, only a small portion of them have the qualities and service model I’d look for in an advisor.

I’ve had this question come up many times in the years since, and my friend isn’t the only one who’s not sure how to evaluate a potential advisor.  And without knowing what questions to ask, how can you be sure you’re finding someone trustworthy and competent?

Because of this, I thought it’d be helpful to build a checklist you can use to evaluate financial advisors & planners.  If I were looking to hire someone for help with my finances, these are the exact qualities I’d look for and the exact criteria I’d use.  And at the very least, hopefully you’ll be armed with a few good questions to ask.

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