Sorting through complicated compensation plans

Managing earnings tax efficiently may be just as important as the compensation package itself.

You’ve worked hard to rise through the ranks. As a corporate executive, you know all too well the demands on your time, the importance of decisions you have to make, and the stewardship required to keep your company thriving. It’s a demanding job. And managing the significant wealth that accompanies it takes skill, attention to detail and a lot of planning.

Executive compensation packages usually consist of short-term and long-term incentives that come in a variety of forms, above base salaries. They might include annual bonuses and stock options--both of which come in many forms. It might feel like a lot to wade through, especially when you start thinking about the next chapter for you, whether that’s preparing for retirement or a new phase in your career.

How should you draw upon your income options in the most tax-efficient way? Do you need to consider how your investments in company stock will affect you years down the line? These are questions best to ponder while you can adjust how you’re managing your bonuses, stock grants and stock options.

Here are some tips for sorting through these complex compensation plans.

Ask for an accounting of your total benefits and compensation. It’s becoming more common for companies with generous perks to share total compensation package figures with employees. As an executive, you’ll want to know the rules around exercising stock options, vesting schedules and policies about how to draw deferred compensation. Understanding these policies will help you avoid equity concentration down the line as well.

Tip: Pay close attention to the vesting rules. Your window to exercise vested stock options may accelerate upon retirement, and unvested restricted stock and performance shares may be forfeited when you are no longer an employee. If you have unvested awards, consider including them when negotiating your retirement package.

Consider if you can delay lump-sum payments until you’re no longer drawing a salary. When you retire, you’ll likely be at your maximum earnings, and adding lump-sum payments from your nonqualified deferred compensation plan and accumulated stock awards could significantly boost your adjusted gross income as well as your tax obligations. You may be given the choice to take a lump-sum payout in the near term or push payments out five to 10 years, essentially creating a predictable income stream. Your decision is irrevocable, so think through the implications carefully with your accountant and professional advisors.

Work with your advisor to determine your cash-flow needs in the near future. If you’re going to be exiting the organization, whether it’s to retire or do something else, you may be relying on cashing in stock to bolster your income. In your calculations, be sure to include your tax liability when exercising stock options. If you’re planning to retire, think about what you’ll need to fund health coverage or other insurance as well.

Concentrate on equity concentration. Executive compensation often includes substantial equity in your company’s stock. And you may be attached to it. After all, you helped build the company and are proud of what you’ve accomplished. It could be hard to imagine a time when the stock may falter. But there’s no sure thing in investing, so it makes sense to diversify your holdings to limit overexposure to just one investment.

Work with your accountant to sell your stock over time so you don’t trigger unnecessary tax consequences, violate any insider trading regulations, or infringe on any holding rules established by your company. Then work with your advisor to invest the proceeds in a more diverse range of securities. Putting strategies in place for diversifying is best done sooner rather than later, before the situation becomes an issue.

Tip: The Securities and Exchange Commission’s Rule 10b5-1 allows you to strategically sell an established number of shares at regular intervals to avoid perceptions of insider trading.

Delay Social Security. If you’re retiring in the near future, consider delaying Social Security as long as possible so that the payments don’t coincide with years when you have to take large, deferred compensation payments. Avoid unnecessarily increasing your marginal tax bracket and, therefore, your overall tax burden if you can.

Take into account proposed tax code. Every year there is the potential for tax changes that affect executive compensation. You may need to make changes to your income or investment strategy to reduce potential tax burdens. It’s worth revisiting every year and pulling in your advisor and accountant to recalibrate if necessary.

Keep in mind that these are general guidelines. Depending on your unique situation and the plans you’re making for the future, there may be specific actions you could take to minimize your tax consequences. Consult with your accountant and advisor to determine what will work best for you and your family.

Next steps

If your executive compensation package is getting complex:

• Bring together your accountant, financial advisor and attorney for a meeting to discuss your vision for the future
• Keep an eye on tax code changes that may affect your tax responsibility year to year
• Enjoy the wealth you’ve worked so hard to earn; be sure to write that into your plans

Sources: The Wall Street Journal; Harvard Law School Forum on Corporate Governance and Financial Regulation

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Evacuating for a storm or fire? Have these documents ready.

Proactive organization can make insurance claims and other recovery activities easier.

Preparing for an unexpected storm or fire can help protect both your personal and financial well-being. Consider these recommendations for protecting important documents and making a swift, safe evacuation.

Saving your documents

If a fire, hurricane or other natural disaster occurs, the documents needed to rebuild your life should either be with you or stored somewhere safely out of harm’s way. Waterproof, fireproof safes offer protection for your most important items, offering a level of security in the event of a last-minute evacuation. For disasters that can be forecasted further in advance – think weather-related events like hurricanes – it may be beneficial to take important papers with you.

While many of the documents below can be replaced, keeping them safe will make insurance claims and other recovery activities easier. Consider bringing:

• Identification: passports, immigration papers, military discharge papers, immunization records, Social Security cards
• Family records and certificates: birth, adoption, marriage, divorce, death
• Home and vehicle: deeds, titles, registration, loan papers
• Planning documents: wills, trusts, powers of attorney, healthcare directives
• Insurance information: health, life, home, vehicle

Consider placing them in a three-ring binder with pockets for easy portability, and store within a water resistant bag. Waterproof and fireproof boxes are usually quite heavy, but a heavy-duty waterproof bag from a sporting goods store or large, resealable plastic bag can serve as a lighter alternative.

Preparing your emergency bag

Proponents of preparedness recommend keeping a small bag packed with essentials for a quick escape. Your emergency bag should remain ready to go at all times, ideal for an unanticipated evacuation. Your water resistant duffel bag or knapsack can include items such as:

• Your documents binder
• Photos or video of your property for later insurance claims Safe deposit box key, if applicable
• Notepad and pen flashlight
• Small first-aid kit
• Bottled water and nonperishable snacks
• Extra resealable bags

An additional “quick grab” list will ensure you won’t forget items that would be inconvenient to keep in your emergency bag at all times. Examples include:

• Backup of your computer, especially if it stores personal information
• Cash for food and gas, as ATMs may not be in service
• Required medications
• Phone or tablet and chargers

Planning for pets

If conditions are unsafe for you, they’re unsafe for your pets as well. Research in advance which public shelters, lodging facilities or kennels can take care of your pets if you’re unable to bring them with you during an evacuation. If you have an exotic pet, try contacting local pet stores or zoological gardens located in a safe area. Your local SPCA or other pet-oriented organization can also likely provide information.

Additional steps to prepare your pets include:

• Making copies of your pets’ updated immunization records
• Filling out a pet ID card with a recent picture, description, contact information, medical details and care instructions
• Compiling a kit with items like collars, leashes, medications, food, water, treats, toys, litter/pans, first aid supplies, and carriers

Depending on the type of natural hazards your area is prone to, additional provisions might be needed. But regardless of the particular peril, these precautions can provide a greater sense of security in the face of an unexpected disaster.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

From the Desk of Dale Crossley and Evan Shear

We hope you and your loved ones are doing well.

There’s no shortage of nerve-wracking headlines, particularly as Russia continues to wage war against Ukraine. Our hearts go out to the people of Ukraine as they fight to keep their country sovereign. Pair worrisome geopolitical tensions with rising inflation and soaring oil prices, and the markets are struggling to gain ground. Adding to the volatility, during the mid-March Federal Open Market Committee meeting, interest rates were increased a bit earlier than anticipated to help curb rising inflation. The market downturn is the unfortunate part of investing. Although it's very hard to keep emotions in check with the current headlines, we carefully plan for periods of economic downturns and market instability. 

Although expected, March was the first interest rate increase since 2018. The decision was based on 2022 inflation projections previously at 2.7%  and adjusted up to 4.3%, as well as GDP growth projections originally at 4%, but adjusted down to 2.8%. By raising or lowering interest rates, the Fed stimulates or slows down economic growth, as needed. Fed officials anticipate at least another 150 basis points in rate hikes by the end of the year to keep rising inflation in check. The markets will be closely watching the timing and frequency of interest rate increases as it's a delicate balancing act raising rates enough to curb inflation, but not too much as to completely stunt economic growth. 

Lastly, you may also be aware that during the first quarter of this year, we experienced a yield curve inversion of the 2-year Treasury yield and the ten-year Treasury yield. This is often, but not always, an indicator of an upcoming recession. It’s important to note that the spread between the 3-month Treasury yield and the 10-year Treasury yield has not inverted, which is positive. While this yield curve inversion is being carefully watched, since 1976, there have been 10 inversions of this yield curve, but only 6 recessions.

The Russia-Ukraine conflict continues to be a destabilizing factor in global markets, but the Fed has repeatedly asserted that the U.S. economy and labor market are strong. We’ll be keeping a close eye on all of these factors affecting the markets and keeping you informed. As always, if you have questions or concerns about your portfolio, please do not hesitate to reach out. 

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All opinions are as of this date and are subject to change without notice. Past performance is not a guarantee of future results.

Deep clean your portfolio this spring

Mark your calendar with important market deadlines and closures.

Refresh your portfolio this spring by reviewing your expenses and checking your credit report.

Spring 2022 market closures

• Apr. 15: Good Friday
• May 30: Memorial Day

Dates to remember

• April 18: Tax Day - The deadline to file your return and pay taxes or request an extension. Also, first quarter estimated tax payments are due, if required.
• April 18: Last day to contribute to traditional and Roth IRAs or health savings accounts for 2021.

Things to do

• Mind your RMDs: If over 72, take required minimum distributions (RMDs) from your IRAs and qualified plans. You must begin RMDs by April 1 the year after you turn 72. Subsequent distributions must be taken by Dec. 31 each year. That means if you reached 72 during 2021, and you delayed your 2021 initial RMD until April 1, 2022, you still have to take your 2022 RMD before Dec. 31, 2022. For more information, go to irs.gov/rmd.
• Home in on housing: If you’re considering buying or refinancing a home, keep an eye on mortgage rates and plan to review the terms with your advisor – this transaction will impact your financial plan.
• Consider an extension: If applicable – particularly if you hold securities subject to income reallocation – ask your tax advisor if filing an extension with the IRS would be beneficial.
• Tune up your portfolio: Similar to your retirement accounts, consider a seasonal review of your portfolio to ensure your allocation is optimal for your objectives.
• Review your cash flow: Make sure all expenses are considered and that you’re still allocating enough to your savings retirement and “rainy day” accounts. Flexible liquidity is key.
• Consolidate and donate: Create a spring cleaning ritual and let go of the clutter consuming space in your home – digitizing your files is a good place to start. Though giving items away offers its own benefits, remember to get a qualified appraisal for more valuable donations.
• Comb through your credit report: Making a habit of checking your credit report at least once a year can help you detect and dispute errors.

Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. The process of rebalancing may result in tax consequences. Asset allocation does not guarantee a profit nor protect against loss. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value. © 2021 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James financial advisors do not render legal or tax advice. Please consult a qualified professional regarding legal or tax advice. 21-BDMKT-5147 ME/KF 11/21

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Five habits of 401(k) millionaires

Although a million dollars may seem like a daunting figure, especially if you haven’t been diligent about saving, there’s good news: you don’t have to make $1 million to save $1 million.

Many individuals who are saving for retirement aim to have at least $1 million in their retirement accounts when they exit the workforce. But retirement savings aren’t a one-size-fits-all matter. Instead, the amount you’ll need depends on a variety of factors, including your lifestyle, specific financial obligations, future plans and health needs.

According to a recent study, the number of 401(k) plans with a balance of $1 million or more hit 180,000 in the first quarter of 2019, marking a 35% increase from the end of 2018. While the circumstances of these 401(k) participants may have varied on the margins, all were average workers who followed a handful of basic principles that enabled them to help successfully prepare for retirement. Below, we explore five of these principles, including how you can apply them to your financial plan.

Start Early

A powerful tool when it comes to saving for retirement, compound interest refers to the interest you gain on a loan or deposit. And the best way to take advantage of compounding is by saving and investing early on. In fact, a recent study showed that the average 401(k) millionaire started saving early and remained invested for at least 30 years.

As you may have read in some of our other pieces, compounding in positive markets – even at a modest rate of return – can allow you to increase an initial investment over a period of time.

Maximize your contributions

In 2022, employees can contribute a maximum of $20,500 to their 401(k) accounts, not counting any potential employer match. Depending on your income, maxing out your contributions may be more challenging earlier in your career. However, studies have found that the average 401(k) millionaire contributed a minimum of 10% to 15% of their income year after year.

Make the most of your employer’s match

Many employers offer to match their employees’ 401(k) contributions up to a certain percent, and failing to meet this match is like leaving “free money” on the table. Even if you’re not in a position to max out your 401(k) contributions, you should consider contributing the minimum amount necessary to earn your employer’s match.

Not convinced? According to one study, 28% of contributions in the average account of 401(k) millionaires came from their employers. Each year, employer contributions increased the average 401(k) millionaire’s savings by almost $4,600.

Choose the right asset allocation

A 2000 study by economists Roger Ibbotson and Paul Kaplan found that asset allocation accounted for more than 90% of the variation in a portfolio’s return over time. If you’re a long-term investor, you know that asset allocation has been one of the most important determinants of your investment earnings over time.

Investing in growth-oriented investments can help significantly boost your retirement savings through the years. While this strategy may not be appropriate for everyone, research has shown that the average 401(k) millionaire invested roughly 75% of their portfolio in growth-oriented investments such as equity mutual funds.

Avoid cashing out early

As most 401(k) millionaires know, staying the course and maximizing your earnings are crucial in helping meet your long-term retirement goals. You should resist the urge to cash out early even if you change jobs. Instead, consider rolling your current 401(k) balance into your new employer’s 401(k) plan or another option. Early withdrawals come with tax consequences and other penalties. It’s also best to avoid abandoning your investment strategy in turbulent market conditions. Many investors who cashed out in a market downturn missed part or all of the subsequent recovery.

NEXT STEPS:

• Assess your progress. If you haven’t checked your 401(k) balance in a while, now is a good time to do so. Understanding where you are can help you determine a sound strategy to attempt to reach $1 million in savings by retirement.
• Revisit your investment strategy. Is your asset allocation consistent with your retirement savings goals? Your invest­ment mix should reflect your growth expectations and risk tolerance, as well as your time horizon until retirement.
• Make necessary adjustments. Depending on how far you are from your retirement goals, you may need to increase your monthly contribution rate or adjust your investment mix. Working together, you and your financial advisor can navigate these decisions and help you work toward the retirement you envision.

Sources: cnbc.com; fidelity.com; Ibbotson, Roger G. and Kaplan, Paul D., Does Asset Allocation Policy Explain 40, 90, 100 Percent Of Performance? Financial Analysts Journal, Jan/Feb 2000, Vol. 56, No. 1. Available at SSRN: https://ssrn.com/abstract=279096

Investing involves risk and investors may incur a profit or a loss. Past performance may not be indicative of future results. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 ½ a 10% federal penalty tax may apply. Diversification and asset allocation do not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.