esop small

Handling ESOP Shares & Taxes

Joe OcchipintiJoe Occhipinti
Wealth Advisor
Warren Street Wealth Advisors

 


Sometimes an employer’s benefits program can include an employee stock ownership plan, commonly referred to as an ESOP plan. An ESOP plan is an employee benefit that allows its company’s participants to purchase the common stock of their company. Those who participate often receive tax benefits for purchasing these shares, and companies believe that allowing their employees to purchase shares of the company will incentivize employees to perform well and boost the share price.

This is an excellent program to take advantage of if your company provides it, but there is something to be mindful of, which is: How can these shares impact my tax liability?

Well, the tax issue doesn’t become relevant until you approach retirement and begin to think about taking your balance out of the plan. When you become ready to do this, you are presented with two options on how to handle the balance.

Option 1 is to take the shares from the ESOP program and roll them into an IRA. Taxes do not come due, but you will be liable for the taxes when you take a withdrawal from the account. The amount will be taxed at your current ordinary income rates.

Option 2 is to move the shares into a non-retirement account. In this method, the ESOP shares are moved in-kind and you pay ordinary income tax rates on the average cost basis of the shares, which is the average price you paid for all the shares you own and typically below market value. Then when the shares are sold within the account, the amount in excess of cost basis is taxed at long term capital gains rates.

 

(1)


It may seem like you’re paying taxes twice in the second option, but by taking advantage of net unrealized appreciation (or NUA), you might be able to save yourself on taxes in the long run. You see, long term capital gains rates are typically lower than a person’s income tax rates with capital gains being 0, 15, or 20%, so a person would be paying ordinary income tax on a portion, then long term capital gains on the remainder, again assuming the shares have been held for 1 year or longer.

This can be a tricky process, and most employee benefits programs only allow you to execute this process once. Make sure you have it right.

Warren Street Wealth Advisors has worked with employee ESOP shares before and executed NUA strategies. Contact Us today and schedule a free consultation on how to best handle your ESOP shares.


 

  1. This item  is only used as an illustration of the strategy. Illustration does not indicate how all tax liabilities could play out. All investments carry specific risks and please consult your financial professional before making investment decisions.

Warren Street Wealth Advisors are not Certified Public Accountants (CPA), and this is not considered personal or actionable advice. Please consult with your accountant or financial professional for further guidance on whether an NUA strategy is right for you.

Disclosure: Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

"There is no getting away from you guys."

9 Year End Tax Tips for Investors

Blake Street

Blake Street
Chartered Financial Analyst
Certified Financial Planner®
Founding Partner & CIO  
Warren Street Wealth Advisors



I know, I know, you’d rather be thinking about the holidays than taxes. Consider us
The Grinch for even bringing this up, however, the timing is important. As the years draws to a close it is important that you consider year end tax planning before 2017 strikes our calendars.

Here are the some of the biggest items for consideration for an investor before year end:

1) Changes to the tax code?

There were no significant changes to tax law from 2015 to 2016, prepare for much of the same for your 2016 filing.

2) Don’t forget your RMDs (Required Minimum Distribution)

If you’re over age 70 ½, make sure you take your required minimum distribution (RMD) by December 31st. Investors who turned 70 ½ this year can defer their 2016 RMD until April 1st of next year, but that will mean taking two RMDs next year. Investors who turned 70 ½ last year and deferred their 2015 RMD to 2016 need to make sure they take their 2016 RMD by December 31st. Important to note: RMDs apply to most retirement accounts, not just IRAs; 401(k)s and even Roth 401(k)s are subject to RMDs.

3) Max out your IRAs

If you are eligible, be sure to max out your IRA when you can. An individual can contribute up to $5,500 per year, or $6,500 if over the age of 50. These contributions can be on a tax deferred basis or after-tax basis (ROTH IRA) depending on your personal goals and objectives.

The truth is you can cut these checks all the way up until the time you file your taxes, but as like I to say to myself, “save early, save often.”

4) Consider a ROTH conversion

If you think you’re in a lower tax bracket now then you will be in the future, and you’ve got most your assets in pre-tax buckets like a 401(k) or an IRA, it may pay to consider converting some of those assets to a ROTH IRA. The ROTH IRA grows and can be withdrawn from tax free after age 59 ½. Converting assets to a ROTH may create a tax bill today for future savings, so be aware.

One wonderful perk of a conversion is the fact that you can undo it should the terms or tax implications look unfavorable before you file. This is called recharacterization. You’re eligible to recharacterize the conversion all the way up until the time you file, including extensions.

Consider converting small portions over a long period of time when your tax scenario makes sense.

5) Make the Most of your Charitable Giving

Charitable contributions are usually deductible up to 50% of your adjusted gross income (AGI). If you have a habit of being charitable, might as well get credit for the deduction. If you plan to give, consider doing it in years when you need the tax break. Also, if you’re at the limit for giving, consider delaying gifts until your deduct limit clears out next year.

One other strategy we like to see considered is gifting highly appreciated securities. You can deduct the market value of the securities subject to your deduction limit, and avoid the capital gains taxes you would have been exposed to should have sold the securities in your name.

If you’re curious for a ballpark figure on what you can deduct, you can see your AGI on Page 1, Box 37 of your 1040, also known as your tax return.

6) Consider Qualified Charitable Distributions

Two bullet points for charity, we can’t be The Grinch! Qualified Charitable Distributions (QCDs) are a wonderful part of the tax code that allows you take distributions from your IRA and send directly to a charity of your choice, tax free.

The best part, QCDs don’t count as income, but do count against your RMDs. QCDs will also reduce your adjusted gross income and could reduce your Medicare Part B premiums, in addition to reducing the amount of your Social Security benefits that are taxable.

7) Gifts to Non-charitable Interests

I know, sometimes your loved ones feel like charity, but if you’ve got any large gifts planned to grandkids, children, or whomever, timing matters. You’re able to gift $14,000 to any individual each year without any gift tax implications. You and your spouse can gift that amount separately to the same person for a total of $28,000.

These gift amounts are a great way to reduce your taxable estate or even fund your wishes in your lifetime without getting into messy gift and estate tax issues. One additional creative idea, you’re able to gift five years worth of gift limits into a 529 plan in a single year, so in this case, $70,000. One asterisk, you can’t gift to this person again for five years. We see folks use this technique if they want to fund large portions of someone’s advanced education while reducing their taxable estate at a faster rate.

8) Tax Loss Harvest

This is something we do on behalf of our clients, but if you manage outside assets on your own, consider booking some of your losses. We all have some, don’t be shy. Losses can be used to offset capital gains generated within your portfolio, carried forward to future years, or even a small portion used to reduce taxable income. One great idea when harvesting losses is trying to replicate your exposure of what you sold, so that you’re not sitting in cash waiting for the IRS 30-day wash sale rule to pass to buy back the original security. If it sounds complicated, let us show you how we do it for our clients.

9) Take Your Gains

To add some intrigue after the last bullet point, it’s equally as important to harvest your gains at the appropriate time. Depending on your income level, you could pay as low as 0% in long term capital gains tax rates. It makes sense to know in what years you’ll fall below this income threshold so that you can pay as little taxes as possible.

 

RMD? IRA? What are these things exactly? If you need help navigating your financial picture, contact us  and schedule a free consultation.

 


Blake Street is a Founding Partner and Chief Investment Officer of Warren Street Wealth Advisors. Blake graduated from California State University, Fullerton in 2009 with a Bachelor of Arts in Finance, and  he is a CERTIFIED FINANCIAL PLANNER™ (CFP™) and a Chartered Financial Analyst (CFA).

Disclosure: Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

 

 

D6T4J0 USA, California, El Segundo, Portion of Chevron's El Segundo refineries, after sunset

12 Keys to Retiring from the Oil & Gas Industry with Confidence

12 Keys To Retiring From the Oil & Gas Industry with Confidence

Retirement is coming soon, and you know you should be excited. But some of us have so many questions and concerns about retirement that we’re more nervous than anything else.

 

We understand.

At Warren Street Wealth Advisors, we’ve helped those inside the oil & gas industry navigate this crucial but confusing time. In the process, we’ve learned local companies’ retirement programs and employee benefits inside and out. So we put together a list of our 12 keys to retiring from the oil & gas industry with confidence.


 

1. Have A Plan

Nothing else in this post matters if you don’t have a personalized financial plan. We believe this so strongly that building a personalized financial plan is the first thing we do with every one of our clients.

A personalized financial plan is the roadmap to your comfortable, stress-free retirement. You can know your benefits inside-out and be clever about taxes and investments. But if you don’t have a map for navigating your retirement, you’ll never feel confident along the way.

 

2. Seriously, Have A Plan

I wrote that twice because I wanted to be certain you see how important this is.

Having a plan is essential for any major life decision, and navigating your retirement with wisdom and confidence is certainly part of a major life decision!

OK, let’s move on…

 

3. Make Sure Your Retirement Timing is Correct

When you go to retire, make sure you are doing so at an advantageous time. Eligibility for annual bonuses, vacation days, or vacation payouts could all be dependent on when you retire from the company.

For some local companies, retiring in April will make you eligible for your next year’s bonus. If you do not work the first quarter, you will be ineligible for the bonus.

So at this company, for example, if you retire in May of 2016, then you would be qualified for 5 months (or 5/12ths) of the 2017 bonus. Remember, it all adds up, and this can be helpful as you begin to transition into retirement.

 

4. Utilize Your Vacation Time

If you retire at a time where you are eligible for vacation days or can get paid out on the vacation days, use them! You earned the time!

For some companies, each year on January 1st, your vacation time resets and for every month of work, you are eligible for 1/12th of your vacation time (whatever that may be depending on how long you’ve been with the company).

If you don’t want to use your vacation time, then some companies will pay you for the vacation days you do not use. If you had 2 weeks of vacation, they you would get 2 weeks worth of pay.

 

5. Retire After 55 But Before 59½ Without Paying Penalties

Here’s a scenario we see all the time: you’re 57. You want to retire. You don’t want to wait until you’re 59½ to do it. But you know that there’s a 10% federal tax penalty and a 2.5% California state tax penalty if you take money out of your 401(k) before then. So are you stuck?

Nope.

Leave some money in the 401(k) to avoid penalties. Some oil & gas companies have provisions in their plans that allow flexibility when it comes to taking withdrawals. Whether this be a one time withdrawal or setting up a monthly distribution, there may be a way to get around those pesky penalties.

There are a lot of moving parts here, but at WSWA, we use these rules to make certain that none of our clients pay penalties. Ever.

 

6. Budget Your Medical Subsidy

Medical benefits can cost substantially more from some companies in the oil & gas industry while you’re in retirement. Make sure you are properly planning for medical coverage in retirement and making it a part of your budget. We recommend a quick call to your benefits department and ask them to run a calculation of expected cost for your medical insurance in retirement.

A spouse may have a better or more affordable medical benefit. Be sure to examine all of your options.

 

7. Say “Goodbye” To Credit Card Debt

If you have significant credit card debt, then it’s time for a plan (there it is again!), a budget, and some hard work.

Credit card debt can be intimidating, but you can pay it off! At WSWA, one of our favorite things to see is a client freeing himself or herself from the stress of mounting credit card debt. You may just need some help and a plan.

 

8. Build Up 6 Months Worth Of Emergency Savings

We’re always optimistic about the future, but sometimes life takes surprising and difficult turns. Wise financial planning means being prepared for those situations.

We recommend that you save at least 6 months worth of living expenses in case of an emergency. So if you need $4,000/month to live, then have around $24,000 saved in savings and checking. That way, you’re prepared for the ups and downs that can happen.

 

9. Build And Keep A Budget

We get it: it’s no fun to build a budget. But writing down all your income and expenses will help you identify where you can save.

Building a budget doesn’t mean eliminating all of your fun, either. Get rid of the stuff you don’t use and keep what makes you happy! Do shop your auto insurance around for a better rate. Do call your phone company and reduce your bill. Don’t quit your bowling league if bowling makes you happy.

Not sure where to start with your budget? No problem. Use our free budget builder to make it easy.

 

10. Wait Until Full Retirement Age To Take Social Security

There is all kinds of information out there about what to do about your social security. Let me boil it all down to one simple point for you: you don’t have to take it at 62! When we build a financial plan for a client, we use a tool that calculates all options for optimizing social security. And no matter how many times we do it and how many ways we look at it, one thing becomes clear every time: it’s usually best to wait at least until your full retirement age (66-67) to take social security.

There is also plenty of evidence to support waiting until age 70 too as the 32% increase in benefit can prove worth the wait. These decisions are typically based around your health at age 62 when deciding to collect or to continue to defer. It’s ultimately your decision, and we suggest weighing your options before committing to collecting the 25% reduced benefit at age 62. *Note if your full retirement age is 67, collection social security at age 62 is 30% decrease in benefits. Long story short… it pays to be patient.

 

11. Use Your 401k Efficiently

Max it out. Diversify your investments. You could hire a pro (like us!) if you don’t love following the markets.

Maybe your 401(k) program allows you to buy common stock shares or has an ESOP programs. These can be hard to understand at times and also have significant tax implications. NUA? Ordinary rates vs. capital gains rate? What?

Make sure you are being tax efficient with your 401(k) when it comes to planning for retirement and managing your tax bill when you retire.

Plus, hiring a pro means you’ll have more time for bowling.

 

12. Have A Plan

You didn’t think this was going to end without one more reminder, did you? If you’re not sure where to start with your financial plan, that’s OK: we can help.

Plus, if you’re confused about any of the information above, then setting up a plan with a CERTIFIED FINANCIAL PLANNER™ (like our very own Aileen Danley, CFP®) is the easiest way to walk through all of it.


 

 

Schedule a free consultation to talk through your finances and take the first step toward building a confident retirement.

1eywfs

Tax Write Offs. Tax Write Offs Everywhere…

It’s no secret that streamers don’t like paying taxes, we don’t either. Don’t let taxes drag down your profits as a streamer or content creator.

Using bookkeeping software should be one of the first things you do to take control of your stream as a business and attempt to reduce your tax liability. Bookkeeping will allow you to classify your stream expenses and potentially turn them into tax write offs.

What can you write off you might be asking? Well let’s start with some of the easy ones:

Computer Equipment & Software – Yes this means games. Since you are most likely using games or other pieces of software to entertain your audience, this is a necessary business expense for you. Don’t forget that if you purchase computer parts, upgrades, or even a whole new system that this is necessary for you to complete your work  they can be written off

Your Streaming Space – Also known as your home office. Most people are streaming out of their homes, and that means that part of your mortgage or rent goes towards the space for your stream. This percentage of space can be written off every year. As a simple example, if you use 25% of your space for your stream, and your rent is $1,000, then you can write of $250 per month for a total of $3,000 per year.

Travel Expenses – I’m assuming you went to Twitchcon. Well, you guessed it, that travel expense can be deducted. You went to a location to help promote your business, maybe took some meetings, and tried to grow your brand. All of which are very legitimate business expenses.

Meals & Entertainment – Do you have a partner for your stream? Are you collaborating with other streamers? Well, if you go meet with them for coffee, lunch, or dinner, and discuss business during the meals, then the meal expense can be written off as a tax deduction. Up to 50% of the total expenses associated with meals & entertainment can be deducted as long as you are conducting business.

As you can see, if you are spending money on your business, the stream, then there is a possibility that the expense can be written off to lower your taxable income.

Contact Us to learn more about what you can do to lower your taxable income and protect your earnings as a streamer.

 

Joe Occhipinti


Joe Occhipinti
Joe@warrenstreetwealth.com
714.823.3328

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

24101702220_83583c0291_b-800x500_c

This Too Shall Pass

This too shall pass…

It’s 10:38 p.m. on November 8th, 2016 and it appears global stock markets don’t like our pick for the 45th President of the United States of America. Last I checked, the S&P 500 futures were trading lower by about 4%.

My phone has been lighting up since about 6:00 p.m., but nobody asked about my thoughts on the election or who I voted for. I cast my ballot for the Libertarian candidate, Gary Johnson, for the record. Most of the texts were of the “should I buy?”, “sell?”, or “I feel really bad for you” variety. Anyone who got a response was likely bored to tears with my response:

“This too shall pass.”

Consider me wired for this stuff, or desensitized, or maybe a combination of the two. For our clients, we can’t allow ourselves to get too high or too low based on the sentiment of the individual moment, otherwise we’d deliver little value.

The President is a small actor on this global stage and global economy we’re all a part of. I give the American worker, the global consumer, and businesses everywhere too much credit that can’t be shared with the POTUS. Should they be revered and respected? Sure, whenever possible. Do they dictate profits? Currency movements? Interest rates? Tangentially at best.

All Presidential policies run the gauntlet in hoping to see the light of day, and by the time they do, corporations and investors everywhere will adapt and carry on.

Markets work. Even if in the short term they drive us mad. I invest because I believe in you. I believe we’re always getting better, developing new products, better services, and those who risk their capital to support that should and will be rewarded.

Trump doesn’t change that. An ugly election season doesn’t change that. We’ll approach investing the same way today as we did yesterday. We seek value, and we seek to protect capital when the trend is against us. Fear can never be allowed to define a process.

This too shall pass.

Respectfully yours,

 

Blake Street, CFA, CFP®

Blake Street

Blake Street, CFA, CFP® is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

benefits-of-google-drive

SCE Medical Benefit Breakdown

In the 12 Keys to Retiring from SCE with Confidence, #5 states “Take Advantage of Your Medical Subsidy”. If you are retiring from Southern California Edison you might be eligible for a retiree medical benefit. This will be a new expense you should budget for in retirement. Here are the two common retiree medical benefits and how they work…

85% Subsidy

“Retirees selecting a higher cost option pay 15 percent of the lowest cost option’s price tag for their coverage (20 percent of that cost for dependent coverage) plus the entire difference in cost between the lowest cost option and the option they select.”*

In short, this benefit provides 85% of the lowest cost medical plan available for your to use towards any plan of your choice. Here’s an example: If the lowest cost medical plan is $1,000 per month, then Edison would provide you $850 (85% of $1,000) to use towards any plan you choose, your out of pocket would be $150. This is the difference between the total plan cost of $1,000 and the subsidy benefit provided to you of $850 in retirement.

Using the same scenario above: If you choose a more expensive medical plan in retirement, let’s say the total cost is $1,500, your 85% subsidy would still provide you the same $850 benefit (85% of the lowest cost plan) towards the plan of your choice. Meaning your portion would then be $650 per month ($1,500 – $850).

This scenario is for retirees who became retirement eligible by 12/31/2008 or who had completed at least 25 years of service, known as “grandfathered”.

50% Subsidy

“Future retirees (after 2008) who are not ‘grandfathered’ [still pay more] for coverage if they retire before age 60 and/or with less 15 years of service. For retirees not meeting this age and service requirement, 50 percent retiree contributions are applicable…”*

This benefit will cover 50% of the lowest plan available in 2008, which is the 2008 Kaiser Health Plan. This benefit is not as rich as the 85% benefit, but it’s very important to note that this retiree medical benefit could save you a lot of money in retirement.

In practice, if the 2008 Kaiser plan costs $1,000, then SCE will contribute 50%, or $500, to any plan you are enrolled in.


Also important to note is how long the coverage will last:
“…new medical options were implemented for the employee population effective January 1, 2010. These same medical options were made available to the Flex retirees who were not eligible for Medicare coverage. For Flex retirees and their spouses covered by Medicare, medical options designed specifically to work with Medicare coverage were included. Once retirees or their spouses become Medicare eligible, their primary source of medical benefits is through their Medicare coverage. The benefits from the SCE sponsored medical plans are secondary to Medicare’s benefits.”*

Finally, in order to combat increasing costs, Southern California Edison has also included language on adjusting their contribution toward plan costs: “For future retirees, the Company’s contribution toward their medical plan costs will be subject to an overall limit or cap, established based upon the costs of the medical plans in 2008 and adjusted by factors tied to the rate of general (not medical) inflation.”*


Key takeaway: Both of these options are continuation benefits. The amount you’re currently paying every two weeks from your paycheck will be the same amount you’d pay in retirement if you continue with the same coverage. Take a look at your paystub and use this amount to figure out a monthly estimate for retirement and add that amount to your budget.

 

Contact Us or attend one of our Edison Retirement Workshops to learn more tips like these and how to best plan your retirement.

 

 

 

*2015 General Rate Case Vol. 2, Pt. 1

Information subject to change based on employee benefit agreements, please confirm with Edison Human Resources. The information above is not considered personalized actionable advice, individuals should confirm their benefits with Edison Benefits Department and their professional advisor(s). Warren Street Wealth Advisors offers this article for educational purposes only.

 

This article is for informational purposes only and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in this literature and due to the static nature of content, those securities held may change over time and current holdings or trades may be contrary to outdated posts. Warren Street Wealth Advisors, LLC is a Registered Investment Advisor.

 

Keep more of what you earn

It’s Your Stream, Your Money

As many have come to learn, taxes can be the most complicated part of being a full time content creator or professional gamer. With some people being considered contractors or employees of a team, or both, it can be difficult to navigate your tax liability and learn how to reduce it.

However, there are solutions available. The biggest solution for those receiving a majority of their income via 1099 is the Solo 401(k) option, or “Solo(k)”. The Solo(k) is essentially a 401(k) plan but for a single person, and potentially a spouse, giving them the ability to defer their taxes and profit share themselves to help reduce tax liability come April.

So what can the Solo 401(k) do for a streamer or pro player?


solo projection
Table provided by Robert McConchie, CPA/PFS®

This example shows a streamer/player earning $225,000 in 1099 income, assumes $30,000 in business expenses across the year, a standard deduction (single person, 2016), and standard exemption (single person, 2016). Additionally, California state tax rate was used in conjunction with the Federal tax, and you can see the savings between utilizing and not utilizing the Solo 401(k), a $20,000 savings to be exact.

The savings comes from the $18,000 personal deferral then a profit share from the business of $35,000 for a max total deferral of $53,000 income within the year. Establishing a Solo 401(k) account is beneficial on multiple fronts; it allows you to set money aside for your retirement date, reduces your tax liability today, and can even be borrowed against should you find yourself in a pinch.

Now, for some streamers who are married, you have the ability to put your spouse on to your business’ payroll. How can that impact your tax savings come year end? Here’s a conservative estimate below.

solo projection spouse
Table provided by Robert McConchie, CPA/PFS®

Using the same amount of income, we can see that tax savings can also be found by correctly setting up your business to include your spouse on payroll, a 401(k) contribution for them and take advantage of additional tax savings.

Opening a Solo 401(k) is one thing you can do, but you can see the immediate impact it can make for full time content creators.

The Solo 401(k) is one of many things that every content creator should do to help minimize their tax liability into the future. Don’t wait to open one. In order to receive the tax benefit, the account must be opened within the calendar year.

Contact us today to set up a free consultation and learn what you can do to maximize your tax savings for 2016 and into 2017.

 

Joe Occhipinti

Joe@Warrenstreetwealth.com
714.823.3328
www.warrenstreetwealth.com/esports

 

The contents of this article are not meant to be personal or actionable tax advice. Please consult a tax professional or your personal advisor before making any decisions. IRS & DOL guidelines must be carefully considered before choosing the retirement plan or tax advantaged savings vehicle that is right for you. The illustrations above are of hypothetical scenarios and are meant strictly for informational purposes.

Joe Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

A standard deviation diagram

Marketing the Safety Out of It

A growing theme in investing is to target and invest only in the least volatile stocks in the market. One simple example of this is take the S&P500, which is a representation of the 500 largest publicly traded stocks in the United States, and only invest in the 10% of companies with the lowest standard deviation of the 500. This would produce names such as AT&T, Coca-Cola, and Johnson & Johnson. 

This simple concept traditionally would result in an investor owning a lot more safety, blue chip, and high dividend yielding stocks. Not a bad bet in a historic context. Looking forward however, we have an accelerating concern over the price of these types of companies, which may lead to them not being as safe as one would expect.

One metric we look at to value stocks is the Price to Earnings ratio, the easiest way to describe this is what price is an investor willing to pay for every dollar a company earns in profit? A higher P/E ratio implies more expensive,  a lower one implies cheap. Comparing a stock, or an index, such as the S&P500 to its historical average P/E can give you a relative idea of whether something is expensive or cheap compared to historical  standards.
Historically, going back to 1972, the companies in the lowest 10% volatility bucket in the S&P500 (as measured by standard deviation) produce a historical median P/E ratio of roughly 13. As is stands today that same low volatility class of stocks trades between a P/E ratio of 23 to 24.

Low Vol Record PEChart provided by Ned Davis Research, Inc.

Why is this troubling? Well, when prices revert to the mean, and investors are willing to pay less for those same dollars of earnings, it spells trouble for those who hold these assets, especially those who have been chasing the stability and dividends these stocks were expected to provide.

What is causing this? Let’s take a look at the major contributors:

Fed policy. While artificially low interest rate policy is intended to push investors into riskier assets, some investors still want safer assets. Low volatility stocks have higher dividend yields, making them bond proxies.

Sector attribution. The low volatility group is concentrated in Utilities, Financials, and Consumer Staples, which have high dividend yields and P/E ratios that are above their long-term averages.

High valuations for the broad market. The median P/E for the S&P 500 is 24.0, well above its historical norm, which has pushed investors into “safer” stocks.

Secular trends. Fear is a stronger emotion than greed, so investors have flocked to “safer” assets.

Industry innovation. ETFs have enabled investors to more easily buy themes like low volatility.

The first three factors are the most likely the first ones to threaten this crowded trade. The one that has me the most troubled is the fifth factor. Industry innovation has led to specialized investment products that make it very simple for retail investors to buy into this wave of low or minimum volatility assets. We’re seeing these assets recommended in droves to competitor’s clients, with little to no consideration given to how crowded or expensive the trade may be.

These assets in the broad context of a well diversified portfolio may make sense, but from my perspective every asset has a time and a place. Currently, I would not be overpaying for safety by using these low volatility factors we’ve explored above. There are other ways. Like always, when assets deviate from a historical valuation range, it can take quite awhile to be proven right and see them correct. We’re not yelling fire in a crowded theater but would like to see investors better educated on the risks ahead.

 

Thank you for reading!

Blake Street
Written by: Blake Street, CFA®, CFP®, Chief Investment Officer

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

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Lump Sum? Annuity? What?

If you’ve read our 12 Keys to Retiring from SCE with Confidence, you’ve seen us make mention of the cash balance pension plan. It is a key part of your successful retirement from Edison, and we want to make sure you make full use of it.

Here’s the 411 (people still say this, right?) on the cash balance pension plan:

Your choices:

Lump Sum Option – The lump sum option is a one-time pay out of the balance of the pension. After you have been granted the lump sum, you are free to use it how you see fit, but if the funds are not rolled into a tax qualified account, such as an IRA, then a taxable event can take place.

Annuity Option – A fixed payment for the life of the annuitant (the one who receives the benefit) and a spouse.

SCE Annuity Options include:

  1. Spouse’s Pension – which provides the highest annuity payment to the retiree and the smallest benefit to your beneficiary on death
  2. 75% Contingent Annuity – provides a slightly smaller annuity payment, but an increased value to your beneficiary on death
  3. 100% Contingent Annuity – the beneficiary will receive the same benefit as the retiree when the retiree passes away, but this is the smallest annuity payment

What are the pros and cons?

Lump Sum Option

Pros

  • Flexibility in access and using funds
  • Defer taxes on income you don’t need
  • Ability to reinvest into the market
  • Legacy/Inheritance planning
  • Improves your net worth

Cons

  • Access to lump sum could create poor spending habits in retirement
  • Subject to market and investment risks
  • If not properly handled, can create a taxable event for retiree

Annuity Option

Pros

  • Guaranteed income for life of annuitant
  • Income options available for spouse after death
  • No market fluctuations
  • Opportunity to receive more benefit than the lump sum if you live long enough

Cons

  • If you don’t live long enough, you could not see the full value of benefits
  • Loss of control over timing of cash flow
  • Same fixed payment for life + No cost of living adjustment (inflation)
  • Income contingent on longevity of employer

 

Don’t go through the decision making process alone. Have a plan. Warren Street Wealth Advisors has helped hundreds Southern California Edison employees retire successfully. Whether you’re retiring this year or in 20, we can put you on the path towards success.

Contact us to schedule your free consultation today.

 


 

warrenstreetadvisors006
Joseph Occhipinti is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.