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.
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.
- 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.
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.
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.
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?
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.
Warren Street Wealth Advisors, LLC
17822 E 17th Street, Suite 208
Tustin, CA 92780
Warren Street Wealth Advisors, LLC
226 W Grand Ave
El Segundo, CA 90245
As a Registered Investment Advisor, Warren Street Wealth Advisors, LLC is required to file form ADV to report our business practices and conflicts of interest. Please call to request a copy at 714-876-6200.