Author: Richard Archer

Got Stock Grants? One Tip To Curb Your Tax Bill

Posted on December 15, 2020 by - Investment

Got stock grants?

If you’re like other tech executives, you probably have your fair share of stock grants. Equity incentives are very popular these days but can be confusing—especially from a tax standpoint.

There are different kinds, various ways of taxing them, and even some little-known opportunities for minimizing taxes.

One such opportunity is called a Section 83(b) election.

WHAT IS A SECTION 83(B) ELECTION?

Never heard of a Section 83(b) election?

You’re in good company; hardly anyone else has either!

However, it’s something that could potentially save you a lot of money on taxes, so you should be aware of it.

Equity grants are considered taxable compensation, and a Section 83(b) election tells the IRS that you want to report income tax the year your stock is granted instead of waiting until it vests.

Normally, you don’t pay taxes until the stock vests and you actually take ownership of it. With an 83(b) election, you choose to pay taxes on the stock before it actually becomes yours.

THE RISKS & REWARDS OF A SECTION 83(B) ELECTION

Why would you choose to pay taxes on something that’s not actually yours yet? Because the tax bill might be a lot lower then!

The taxes you pay are based on the fair market value of the stock.

When you are granted stock that doesn’t vest for 3 years, there is a good chance the price of the stock will increase during those 3 years.

The 83(b) election allows you to calculate your tax bill based on the lower stock price on the grant date rather than the higher price at vesting. The higher vesting price could also push you up into the next, higher tax bracket. In fact, tax rates could increase during those 3 years and you would end up paying a higher rate overall.

So, why wouldn’t you choose this option?

Well, there are a number of risks involved.

First of all, the taxes you pay are not refundable. If you leave your company before the stock vests, you will have paid taxes on stocks that you never received. A Section 83(b) election is nearly impossible to rescind or cancel once made. If you pay taxes early, you risk paying taxes that you will never actually owe.

Also, the stock price could go down between the grant and vesting date, which leaves you paying more taxes than you would have if you had waited.

Another risk is that the tax rates will go down, as they did with the Tax Cuts & Jobs Act. If you are married with a taxable income of $300,000, you would have gone from the 33% tax bracket in 2017 down to 24% for 2018.

That’s a big difference.

HOW A SECTION 83(B) ELECTION WORKS

To make a Section 83(b) election, you have to contact your local IRS office within 30 days of the grant date.

Also, you will need to have enough cash up front to pay the taxes, since the stock is not yet yours to sell. Let’s take a look at how a Section 83(b) election would play out in real life.

Let’s say you are granted 3,000 shares when they are worth $15 each and you are in the 32% tax bracket. The shares vest after 3 years when they are worth $50, at which point you sell them with a capital gains rate of 18.8% (including the Medicare surtax).

This is what you would end up paying in taxes for each option:

With Section 83(b) ElectionWithout Section 83(b) Election
Income Taxes Due At Grant$14,400$0
Income Taxes Due Year 3$0$48,000
Capital Gains Taxes Due$19,740$0
Total Taxes Paid$34,140$48,000

This example results in a $13,860 tax savings with the Section 83(B) election.

If the income from the grant pushed you into a higher tax bracket, the savings would be even greater!

As you can see, an 83(b) election has the potential to save you a lot of money in taxes.

However, it is not without its risks.

NEXT STEPS…

You don’t have to weigh the reward and risks of an 83(b) by yourself!

We are here to help you understand an 83(b) election and all the other aspects of financial planning for tech executives.

It is important to make an educated decision before the IRS window closes. You only have 30 days once the stock has been granted.

Schedule a quick call with Richard, at Archer Investment Management to discuss the pros and cons of making an 83(b) election for yourself.

You’ve got more to tackle on your to-do list than worry about how to make smart decisions with your money.

At Archer, we make managing your money easy, so you can get back to your life.

Not a tech executive? That’s okay! We can help you too.

Schedule a quick call with us and see if we can help simplify your finances.

Need a Financial Planner?

ABOUT RICHARD

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

10 Simple Tips to Maximize Your Restricted Stock

Posted on December 15, 2020 by - Investment

Credit should be given to Mystockoptions.com for some of the excellent content in this article.

Incorporating restricted stock and RSUs (restricted stock units) into your financial plan can get complicated. You will need to make plenty of decisions, such as how long you will hold your shares, if you should sell them and put them into an alternative investment, or if you will use the money to meet one of your financial goals. If your head is spinning, take heart. Here are 10 simple tips to help you maximize your restricted stock and RSUs.

RULE NO. 1: SET GOALS

In order to make the wise decisions, you need to determine what you hope your stock will do for you. When you eventually sell the shares, where do you want that money to go? How do your shares and their potential sale fit in relation to your other income, 401(k), and other savings?

RULE NO. 2: KNOW YOUR VESTING SCHEDULE

It is essential to know the dates your grants will vest since you will need to pay taxes on the resulting income. If you want to avoid a hefty tax bill, it requires some forethought.  Your vesting schedule will depend on your company and the conditions they place on the stock, but it is usually time-based, requiring you to work at the company for a certain period before vesting can occur.

RULE NO. 3: UNDERSTAND THE CONSEQUENCES IF YOU WERE TO QUIT

If you leave your company before your restricted stock vests, you will usually forfeit the unvested grants. There can be exceptions to this, so be sure to gather all the details from your company before you make the decision to leave. If you have a significant amount of shares that haven’t vested, it might be worth it to stay with your company long enough to benefit from this reward for your service.  

RULE NO. 4: CONSIDER TAXES

Your taxable income will be the market value of the shares at vesting and is subject to federal income tax, Social Security, and Medicare, plus any state and local tax. Your company may offer you a few ways to pay taxes at vesting, such as withholding shares for taxes, a sell-to-cover transaction for taxes of a portion of the shares, a salary deduction, or simply a check payment.  When you eventually sell the shares, you will pay capital gains tax on any appreciation over the market price of the shares on the vesting date.

RULE NO. 5: LOOK INTO AN 83(B) ELECTION

With restricted stock (not RSUs), you have the option to make a Section 83(b) election with the IRS within 30 days of the grant date. An 83(b) election allows you to pay taxes on the value of the stock at grant date rather than vesting date. If you believe the stock price will be higher on the vesting date and you are confident you will meet vesting requirements, this can be a beneficial move for you. Also, moving the time of taxation to the grant date starts the capital gains holding period earlier, which can make a difference at the eventual sale of the shares.

RULE NO. 6: WATCH YOUR TAX RATES

Be sure to anticipate what restricted stock and RSUs will do to your tax rates when you vest.

The extra income could push your income into a higher tax bracket, raise your rate of capital gains tax, and trigger extra Medicare taxes, possibly costing you thousands of dollars. If you plan ahead, you can implement strategies that could keep you in the lower tax brackets.

RULE NO. 7: DECIDE WHETHER TO HOLD OR SELL

Whether or not you sell your shares at vesting will depend on multiple factors, such as tax planning, financial planning goals, and company restrictions.  If you sell immediately, you can use the shares to pay for the taxes incurred at vesting. If you hold your shares, your capital gains tax will be affected when you sell in the future. Your decision may be influenced by your cash needs, upcoming life events, and other financial planning factors, including diversification, dividends paid on your stock, and alternative investments.  If your company is publicly traded, there can be blackout dates that prevent you from trading and stock ownership guidelines that require you to keep a certain amount of stock. With private companies, there are probably restrictions in your grant or SEC rules that will impact when you can sell.

RULE NO. 8: REMEMBER DIVIDENDS

Even though you can’t transfer or sell restricted stock until it vests, the stock is still issued to you and in your name, which means you could receive dividends. If you have unvested RSUs, this does not apply. But when a company pays dividends on outstanding shares of stock, it can choose to pay dividend equivalents on RSUs. These may be deferred or accrued to additional units and then settled when the unit vests.

RULE NO. 9: DON’T LET COMPANY STOCK SKEW YOUR PORTFOLIO

It’s a cliché, but when it comes to your portfolio, you don’t want to keep all of your eggs in one basket. You don’t want too much of your net worth tied up in your company stock, and since restricted stock and RSUs vest over time, it’s easy to miscalculate how much of your portfolio is reliant on the success of your company. In order to avoid overconcentration, work with a professional to determine how much your holdings in company stock contribute to your overall net worth.

RULE NO. 10: RELY ON A PROFESSIONAL

This stuff is complicated. Sound financial planning, investing, and tax management require specialized knowledge, skills, and experience. At Archer Investment Management, we specialize in serving tech executives with their financial planning needs. We understand your needs and complexities and are here to make sure your financial plan is airtight. If you have ESOs, restricted stock, or RSUs, don’t hesitate to reach out to us to help you maximize these benefits and incorporate them into your overall financial picture. Click here to schedule a phone call today!

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to technology executives. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

Medicare Open Enrollment Starts On October 15th. What Do You Need to Know?

Posted on December 15, 2020 by - Smart Money Tips

When it comes to retirement, there seems to be a never-ending checklist of tasks to complete in order to prepare yourself for this major milestone. You need to save enough to maintain your lifestyle, invest wisely, create a withdrawal strategy, minimize your taxes, and claim your Social Security benefits. But there’s one other critical piece of retirement planning to keep in mind: signing up for Medicare. And with healthcare being one of the top five expenses in retirement, (1) your Medicare choices are some of the most important decisions you will make.

The challenge with Medicare, a federal insurance program designed for people age 65 and older, is that it often seems complicated and confusing. Since there are multiple plans and various enrollment periods, how do you make sense of all the information? Here’s a breakdown of Medicare’s Open Enrollment period and the options available to you.

WHEN IS MEDICARE OPEN ENROLLMENT?

The Medicare open enrollment period happens at the same time every year due to the changes in 2011. For coverage in 2019, open enrollment will run from October 15, 2018, to December 7, 2018. Once December 8th arrives, the enrollment period closes until the following October. During this time, current Medicare users can switch coverage or add or drop parts of their plan.

Open enrollment is not for those who have never signed up for Medicare, unless the open enrollment period also falls during your initial enrollment time, which begins three months before you turn 65 and ends three months after the month you turn 65. But if you only signed up for Medicare Parts A and B during your initial enrollment, open enrollment gives you the opportunity to make changes to your coverage.

WHAT CAN I DO DURING OPEN ENROLLMENT?

Here is an overview of the changes you can make to your Medicare plan during open enrollment:

  • If you have Medicare Part A (hospital insurance) & Medicare Part B (medical insurance), you can switch to Medicare Part C (or Medicare Advantage), which is often contracted by companies that have an agreement with Medicare. This service includes the coverage of both Plan A and Plan B (Original Medicare), as well as additional services like prescription drug coverage and private fee-for-service plans.
  • If you have Medicare Part C, you can switch it back to Original Medicare (Parts A & B).
  • You can reevaluate your Part C plan and switch to a different Medicare Advantage plan.
  • If you already have Parts A & B, you can join or drop a Part D prescription drug plan. This part of Medicare adds the prescription drug coverage for Original Medicare, private fee-for-service plans, and some Medicare cost plans.
  • You can switch your Part D prescription drug plan to a different Part D plan.

HOW MUCH WILL I PAY FOR MEDICARE?

The cost of Medicare insurance depends on a variety of factors. While many people choose Plan A, the premium for Plan B is paid automatically and costs about $134 monthly on average. The cost may vary depending on your income, whether or not you’re still working, and when you originally enrolled. Review the factors to get the best coverage.

As an example to determine cost, if you worked for more than 10 years, your monthly cost for the Plan A premium is $0 because you paid it while you worked. But the costs get higher if you worked for fewer than 10 years, climbing to $422 a month.

The Plan B premium also offers coinsurance after you’ve paid your deductible. This means that for some services you’ll pay only 20% of the total cost.

HOW CAN I IMPROVE MY COVERAGE DURING MEDICARE OPEN ENROLLMENT?

Plan C and Plan D are known as the options with the most coverage. Financially speaking, they are the most comprehensive plans. If you have either the basic Plan A or Plan B, you can improve your coverage using Medigap. This will help you pay for some of the services that are not covered by the higher coverage plans. Part C is also a prudent choice because it provides for services like dental and hearing health, which are not covered by the basic insurance plans.

As you can see, Medicare is complicated and ever-evolving, so don’t try to handle the intricacies alone. At Archer Investment Management, we provide comprehensive financial strategies for a secure future through a highly tailored and hands-on approach. We answer your questions, educate you on your opportunities, and help you prepare for every aspect of your retirement, including healthcare. If you need help evaluating your Medicare options, reviewing your insurance coverage, or just want to ask a couple of questions, we are here to help. Schedule a 45-minute get-acquainted phone call today.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than 20 years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

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(1) https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm

What Spredfast Employees Need to Know About Employee Stock Options

Posted on December 15, 2020 by - Investment

As you have heard, Spredfast has announced a merger with Lithium Technologies. (1) When companies undergo a change this significant, there are often ripple effects that impact those who work for the company. In this case, you may have a large sum of Spredfast options coming due this year.  Do you know what to do? What do you need to know about your employee stock options?

WHAT ARE EMPLOYEE STOCK OPTIONS?

ESOs offer the holder the right to buy a certain amount of company shares at a predetermined price for a specified period of time. Employees are given a share in the potential growth of their company’s value without actually risking their own money, until they decide to exercise those options and purchase shares of the company’s stock.

HOW DO EMPLOYEE STOCK OPTIONS WORK?

Let’s say you work for Company XYZ, and they have issued employee stock options to you at $50. In this scenario, you would have the right to purchase 1,000 shares of XYZ stock at $50 (the grant price) after three years (the vesting period) and within ten years (the expiration date) of the grant date.

Taking the example above, what happens if, after four years, the market price of XYZ is at $100? In this case, you can purchase 1,000 shares at $50, then sell them at the $100 market price, pocketing a $50,000 profit!

But what if, after four years, the market price of XYZ is at $25? At this point, you would not have to buy the shares at a loss. Instead, you can wait until the 10-year expiration date for the stock price to potentially surpass the grant price.

WHAT ARE THE DIFFERENT TYPES OF EMPLOYEE STOCK OPTIONS?

There are two types of ESOs that a company can grant: Non-qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). NSOs are the most common type offered by employers.

Non-qualified stock options do not qualify for special tax treatment and result in additional taxable income to the recipient at the time that they are exercised, the taxable amount being the difference between the grant price and the market value on that date. In addition, when NSOs are exercised, income, Social Security, and Medicare taxes will be withheld.

In contrast, incentive stock options qualify for special tax treatment and are not subject to Social Security or Medicare withholding taxes.

WHAT IS THE TAX TREATMENT OF EMPLOYEE STOCK OPTIONS?

As discussed above, it is clear that NSOs and ISOs are treated differently when it comes to taxation. However, for both types, the grant of the option itself is never considered a taxable event.

For NSOs, taxation begins at the time that the option is exercised. Once exercised, the purchase of discounted stock is considered compensation and is taxed at ordinary income tax rates. When those purchased shares are sold, either short-term or long-term capital gains taxes may be owed. With short-term capital gains, the employee would be subject to tax at their ordinary income tax rates. With long-term capital gains, the tax would be significantly reduced.

Gains on ISOs are not subject to payroll taxes. However, ISOs are a preference item for the alternative minimum tax (AMT) calculation. Also, if you exercise and sell the stock within a year, you will pay ordinary income tax on the difference between the market price at sale and the grant price, much like the treatment of NSOs.

When you exercise the ISO but hold the stock, tax treatment can get quite complicated. In this situation, the difference between the grant price and the market price then becomes an AMT preference item, so exercising ISOs might mean you’ll pay the AMT. If you hold the shares for one year from exercise date (and two years from the grant date of the option), the difference between grant price and market price when you sell the option is taxed as lower long-term gains rather than ordinary income.

HOW SHOULD EMPLOYEE STOCK OPTIONS FIT INTO YOUR FINANCIAL PLAN?

It is important to think of your ESOs in the context of your overall financial plan. First and foremost, your financial plan should be based on clearly defined goals for yourself and your family. Once you have your goals set, how can ESOs best help you reach them? This is never an easy question to answer, but the more you understand about the ESOs at your company and their future growth potential and taxation, the better off you will be.

As you make your decision on whether or not to accept Spredfast’s offer of an ESO buyout, it’s critical to take all aspects of taxation, income, and your financial plan into consideration. At Archer Investment Management, we specialize in helping corporate executives make the most of their complex benefits. We’d love to help you with this important decision. Download our StockOpter® Stock Compensation Summary Analysis report, check out our case studies to see how we’ve helped clients like you, and schedule a phone call today!

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive financial planning and investment guidance and personalized care to executives in technology firms. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

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Six Financial Planning Rules That Everyone With Stock Options Needs To Know

Posted on May 1, 2017 by - Smart Money Tips

If you work for a company that offers Employee Stock Options (ESOs), you may be wondering how you should take advantage of them and whether they can help you reach your financial goals. In a previous article, we walked you through an overview of Employee Stock Options, but even if you understand how they work, you might not know how to maximize their value and how they fit into your financial plan. Here are six financial planning principles that may help you make the best decisions for your financial situation.

RULE #1: SET REALISTIC GOALS

Before you dig into the investments in your portfolio, take the time to set realistic goals for your overall financial plan. If you don’t have goals to aim for, it’s like you’re shooting at a target blindfolded. Without clear and personal goals, you could be easily swayed by unexpected circumstances and the market ups and downs. When it comes to ESOs, they are just one means to achieving your goals.

One ESO detail to keep in mind is that you will eventually want to sell the stock after exercising your options. If you have a clear financial plan and work to minimize taxes, you may be able to move significantly closer to your goals with the proceeds received from the sale of your stock.

RULE #2: CREATE A PLAN

Once you have your goals in place, your next step is to create a strategy for how you will handle your stock options over time. Map out a plan for when to sell your options, making sure you that your actions are not only tax efficient, but they also line up with your goals. For example, selling a significant portion of your stock all at once could dramatically increase your tax burden.

Along those same lines, it’s important that you accurately value your stock options. The last thing you want to do is sell, thinking that you will receive a certain amount, only to learn that your net earnings are much lower. If you were trying to reach a goal with the sale, overvaluing your stock options could hurt your long-term plans.

RULE #3: BUY AND HOLD, BUT CONSIDER DIVERSIFICATION

Because stocks historically increase in value over time, it may be wise to hold your options for a a long time. This is especially the case if you believe that your company is doing well and will continue to do so for a long time. Of course, if part of your financial plan involves selling some of your options for short-term to intermediate-term goals, that is also fine.

However, if a majority of your net worth comes from your ESOs, it may be a better idea to consider diversification. This is akin to putting all your eggs in one basket. Do you really want so much of your financial well-being tied up in one company? The general rule of thumb is to hold

no more than 10% of your portfolio in your company’s stocks and options. Your income is already tied to your company, and now a majority of your net worth could also locked in to your employer. If the company performs poorly, it will depress the stock price and you may be laid off at the same time. There goes your portfolio, your income, and your health insurance all at once. Consider selling some of your ESOs and diversifying the proceeds in something else.

RULE # 4: KNOW THE RULES OF YOUR ESOS

Depending on the type of ESO that your company offers you and the overall company option plan policies, there will be specific rules that you should be aware of. These rules may cover the rights that you have if you are fired, quit, work for a competitor, retire, become disabled, or die. In addition, the rules will explain any vesting policies, which will help you plan ahead and maximize your stock option benefits.

RULE # 5: ALWAYS CONSIDER TAXATION

It is critical that you look at your current income tax bracket and calculate how a sale of stocks will affect your current taxable income. If the sale puts you into a new bracket, you may have to pay more on the proceeds than if you had smoothed your income over time.

In addition, if you have Incentive Stock Options (ISOs), you must familiarize yourself with the Alternative Minimum Tax (AMT). Read more here for a brief description on the different tax treatment of ISOs and Nonqualified Stock Options (NSOs). If you ignore the Alternative Minimum Tax, you may have to pay tax on your gains before you even have the money in hand. (1) This could be an unfortunate situation to find yourself in, so make sure to do your homework on the AMT as it relates to your options.

RULE #6: SEEK SOLID, PROFESSIONAL ADVICE

Stock options are a complicated asset and it can be overwhelming to determine how they fit within your overall financial plan. Because of that, it is important to seek professional advice when making ESO decisions. Make sure the professional you rely on has experience with employee stock options and can help you strategize your best moves.

At Archer Investment Management, we understand employee stock options and have experience helping clients maximize this benefit, minimize taxes, and diversify their portfolios. We’d love to help you with your employee stock options. Book an appointment online today

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive Financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

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(1) https://www.mystockoptions.com/articles/index.cfm/objectID/26A61894-283B-11D4-B9070008C79F9E62/print/1/printformat/pdf

What You Need to Know About Employee Stock Options

Posted on April 16, 2017 by - Investment

If you work for a large company, it’s likely that you have the opportunity to take advantage of a comprehensive benefits package. Understanding all of the perks that you are entitled to is crucial to your long-run financial success. One perk I’d like to highlight is Employee Stock Options (ESO). Through my explanation of the ins-and-outs of ESO’s, you will have a better understanding of how you can make the most of them.

WHAT ARE EMPLOYEE STOCK OPTIONS?

ESO’s offer the holder the right to buy a certain amount of company shares at a predetermined price for a specified period of time. Employees are given a share in the potential growth of their company’s value, without actually risking their own money – until they decide to exercise those options and purchase shares of the company’s stock.

HOW DO EMPLOYEE STOCK OPTIONS WORK?

Let’s say you work for Company XYZ, and they have issued employee stock options to you at $50. In this scenario, you would have the right to purchase 1,000 shares of XYZ stock at $50 (the grant price) after three years (the vesting period) and within ten years (the expiration date) of the grant date.

Taking the example above, what happens if, after four years, the market price of XYZ is at $100? In this case, you can purchase 1,000 shares at $50, then sell them at the $100 market price – pocketing a $50,000 profit!

Alternatively, if after four years, the market price of XYZ is at $25? At this point, you would not have to buy the shares at a loss. Instead, you can wait until the 10-year expiration date for the stock price to potentially surpass the grant price.

WHAT ARE THE DIFFERENT TYPES OF EMPLOYEE STOCK OPTIONS?

There are two types of ESO’s that a company can grant: (1) Non-qualified Stock Options (NQSO’s) or (2) Incentive Stock Options (ISO’s). NQSO’s are the most common type offered by employers.

Non-qualified stock options (NQSO’s) do not qualify for special tax treatment, and result in additional taxable income to the recipient at the time that they are exercised, the taxable amount being the difference between the grant price and the market value on that date. In addition, when NQSO’s are exercised, income, Social Security, and Medicare taxes will be withheld.

In contrast, Incentive Stock Options (ISO’s) qualify for special tax treatment and are not subject to Social Security or Medicare withholding taxes.

WHAT IS THE TAX TREATMENT OF EMPLOYEE STOCK OPTIONS?

As discussed above, it is clear that NQSO’s and ISO’s are treated differently when it comes to taxation. However, for both types, the grant of the option itself is never considered a taxable event.

For NQSO’s, taxation begins at the time that the option is exercised. Once exercised, the purchase of discounted stock is considered “compensation” and is taxed at ordinary income tax rates.  When those purchased shares are sold, either short-term or long-term capital gains taxes may be owed. With short-term capital gains, the employee would be subject to tax at their ordinary income tax rates.  With long-term capital gains, the tax would be significantly reduced.

Gains on ISO’s are not subject to payroll taxes. However, ISO’s are a preference item for the alternative minimum tax (AMT) calculation. Also, if you exercise and sell the stock within a year, you will pay ordinary income tax on the difference between the market price at sale and the grant price, much like the treatment of NQSO’s.

When you exercise the ISO but hold the stock, tax treatment can get quite complicated. In this situation, the difference between the grant price and the market price then becomes an AMT preference item, so exercising ISO’s might mean you’ll pay the AMT. If you hold the shares for one year from exercise date (and two years from the grant date of the option), the difference between grant price and market price when you sell the option is taxed as lower long-term gains rather than ordinary income.

HOW SHOULD EMPLOYEE STOCK OPTIONS FIT INTO YOUR FINANCIAL PLAN?

It is important to think of your ESO’s in the context of your overall financial plan. First and foremost, your financial plan should be based on clearly defined goals for yourself and your family. Once you have your goals set, how can ESO’s best help you reach them? This is never an easy question to answer, but the more you understand about the ESO’s at your company and their future growth potential and taxation, the better off you will be.

We’d love the opportunity to develop a custom ESO strategy for you. Click here to schedule a phone call and please visit us at Archer Investment Management.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful executives and business owners, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and an MBA, he is a CERTIFIED FINANCIAL PLANNER™ and a CFA® charterholder. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

How Might Tax Reform Affect Your Estate Plan?

Posted on April 1, 2017 by - Smart Money Tips

Whenever a financial change occurs at the government level, there is a domino effect in your personal finances. For example, the recent Tax Cuts and Jobs Act affects more than just your net pay. On the surface, we know that Trump’s tax reform bill lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions. But does it have any cascading effects on your estate plan?

As the act and tax bill are still new, it’s difficult to predict with certainty what will happen, but the changes shed light on how estate planning may be affected going forward. Let’s take a look at current law, the notable changes, and what they could mean for you.

ESTATE PLANNING LAW THEN

If you’ve done any amount of estate planning, you know that taxes are an extremely important factor to take into consideration when creating a strategy. Here’s an overview of the estate tax rules prior to the new tax bill:

Estate Tax: The property in your estate is taxed before being passed on to your beneficiaries. There are various tax rates for this, extending up to 40%.

Gift Tax: When you give some of your assets as a gift while you are still alive, that is also subject to tax, up to 40%. However, you don’t have to pay any taxes on the first $15,000 you give each year. That exclusion applies individually to each person you give to.

Generation-Skipping Tax: Property transferred beyond one generation by bequest or gift is also taxed. There is an additional generation-skipping tax with, again, a top rate of 40%.

Basic Exclusion Amount: Any of these three taxes, or any combination of the three, does not apply to the first $5 million of transferred property. This exemption, called the basic exclusion amount, is indexed for inflation, so it is actually $5.6 million for 2018.

These taxes do not apply to transfers between spouses. Also, if you die without using up the entire exclusion amount, your spouse can increase their exclusion amount by whatever you had left of your exclusion. That makes the maximum exclusion possible for 2018 $11.2 million.

Tax Basis: If you give someone an asset while you are still alive, they will take on your tax basis in that property, called a carryover basis. However, if you wait until your death to transfer the asset, their tax basis will be the fair market value of the property at the time of your death, called a step-up in basis.

ESTATE PLANNING LAW NOW

And now for a look at what the tax bill has changed:

Basic Exclusion Amount: The legislation doubles the basic exclusion amount. Depending on how inflation is calculated, this would amount to around $11 million per individual or $22 million per couple. This basic exclusion amount would apply to tax years after 2017.

Estate, Gift, And Generation-Skipping Transfer Taxes: The bill will double the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017. The basic exclusion amount would increase from $5 million to $10 million and would be indexed for inflation. After 2023, both of these taxes would be repealed. Beneficiaries would still enjoy a step-up in basis for their inherited property.

Gift Tax: The gift tax would remain, but with a top rate of 35%. There would still be an overall lifetime basic exclusion amount as mentioned above, twice the current amount. The annual exclusion would remain the same at $15,000, though it would increase with inflation.

ARE THE CHANGES PERMANENT?

Under the current law, only 0.02% of taxpayers pay federal estate taxes, so these changes do not affect a broad section of the population, but rather a few of the wealthiest Americans. (1)

Because of this, there is a chance that a future administration could repeal it or the taxes could be re-adopted at a later date. This is important to keep in mind when making plans based on these changes in the law.

WHAT THIS MEANS FOR YOUR ESTATE PLAN

How will these changes affect you? What does this mean for your estate planning?

First of all, the doubling of the exemption amount means that you can increase your giving. It gives you more freedom to be generous and also the opportunity to remove more from your estate in case the taxes are reenacted later on.

This might also be a good opportunity for you to transfer assets from a non-exempt trust to a generation-skipping trust to take advantage of the increased generation-skipping amount. It may also affect how you handle distributions from qualified domestic trusts, as they wouldn’t be taxable after 2024.

NEXT STEPS TO TAKE

If your head is spinning from the details, remember that the changes to the tax law will likely affect different kinds of trusts and estate plans in different ways. As always, tax law is complicated and you should always work with an experienced financial professional for your estate planning needs.

Since this could only be a temporary reprieve, it is important to take advantage of the benefits quickly. At Archer Investment Management, we act as the quarterback of your financial team and coordinate with estate and tax professionals. If you want to review your current estate plan or would like us to point you to specialists at reputable firms, schedule a phone call online today!

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

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(1) http://www.wealthmanagement.com/estate-planning/estate-planning-implications-gop-tax-plan?NL=WM-17a&Issue=WM-17a_20171108_WM-17a_749&sfvc4enews=42&cl=article_1&utm_rid=CPG09000004413403&utm_campaign=11440&utm_medium=email&elq2=4ad333b7e81d4ce

The Three Things Women Need In Retirement To Be Happy

Posted on March 10, 2017 by - Smart Money Tips

Would you rather plan a vacation or strategize your retirement? A Charles Schwab retirement survey found that Americans spend considerably more time and energy researching vacation possibilities and car purchases than planning for retirement. (1) And even if you are one of the few who has their financial ducks in a row, have you given any thought to the psychological transition that occurs when you reach this milestone? We know that money can only buy happiness if used intentionally, so let’s take a look at the three things women need to experience a fulfilling retirement.

1. THRIVING RELATIONSHIPS

Women tend to struggle with the social changes retirement brings more than men do. In fact, one study shows that 62% of women say they miss the daily social interaction they had at work, and retirement happiness for many women depends on the quality of their social life. (2) You may think that when you retire you will have all the time in the world to spend with family and friends, but the loss of your work community and routine make it difficult to maintain friendships.

To set yourself up for a happy retirement, create goals to get together with friends frequently and find ways to make new friends who are in the same season of life as you. You may meet people through volunteering, taking classes, or joining local retirement groups. It’s never too early to start investing in friendships and social ties that will help you ease into retirement.

2. OPPORTUNITIES TO GIVE

When researching the effects of giving in retirement, Merrill Lynch found that women find great happiness from helping others and giving back to their community and are more likely to define success in retirement by generosity than their financial situation. (3) Approximately 68% of women also feel that retirement is the ideal time to give back. When your working years suddenly end, and you are left wondering what your purpose is, committing yourself to volunteer work gives your days meaning. Any kind of volunteering is beneficial to your psychological wellness, whether it’s shelving books at the library, walking dogs for the local animal shelter, or even giving your time to a cause related to your career.

3. A STRATEGIC PLAN TO PURSUE PASSIONS

While retirement may conjure up images of a slow-paced life with plenty of white space on the calendar, staying busy is the key to a happy retirement. (4) A recent retirement satisfaction survey found that 76% of retirees who were involved in more than ten activities, such as volunteering, creative pursuits, caring for others, socializing, and participating in sports, were more fulfilled in retirement than those who were involved in less than four activities.

In other words, having lots of time on your hands isn’t always a good thing. Enjoy the fact that you aren’t spending the majority of your waking hours at work, but purposefully plan your time so that you aren’t left twiddling your thumbs. Before retiring, make a list of things you want to do and places you want to go. Then, map out a strategy to make them happen. It’s easy to lose your identity when you say goodbye to your career, but setting goals and venturing out into new territory will help you build a new identity and prevent feelings of depression and anxiety.

LET US HELP YOU

At Archer Investment Management, we want to see women feel optimistic about their future. We also believe in taking steps today to plan for a thriving retirement. Let us help empower you by making sure you are on the right track and are considering every aspect of your life in preparation for retirement. Click here to schedule a phone call and take the first step towards a happy retirement.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

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(1) Debt Regret Fuels Financial Stress

(2) Why Women Struggle More Than Men in Retirement

(3) America’s Longevity Bonus – Giving in Retirement

Social Security: What You Don’t Know Could Cost You

Posted on March 1, 2017 by - Smart Money Tips

Do you remember the game of telephone you played as a kid? The game where someone whispered a message into someone else’s ear and everyone repeated it until the final result was completely different? Well, the commonly held assumptions about Social Security are kind of like that. The true details of the system are complicated and difficult to muddle through, and the messages that are received are often skewed.

How important is it to truly understand Social Security? Think of it this way: you’ve been contributing to Social Security your whole life, right back to your first official paycheck. Between you and your employers, you’ve doled out 12.4% of your annual income. That’s a substantial amount and one that could make your 401(k) look like chump change down the road. Don’t you want to maximize your benefits so you get every penny that’s rightfully yours? In order to do so, you need to properly understand how your benefits work. Let’s look at some common Social Security assumptions and set the record straight so you don’t leave money on the table.

1. SOCIAL SECURITY WON’T BE AROUND FOREVER

Many of us, especially those who won’t be retiring for decades, are worried that Social Security will run out of money by the time we retire. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to end in 2019 and the system will rely on incoming contributions to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink to 75% of what many Americans are expecting. (1)

Since you can’t control the success or failure of the Social Security program, educate yourself and plan ahead. Create an account on the Social Security website so you understand your current benefits and know where you stand. There is plenty that could happen between now and 2034 that could impact the program, so don’t believe the myth that there will be no money left for you by the time you retire.

2. WHAT YOU GIVE IS WHAT YOU GET

Social Security is not a savings account per se. The taxes that everyone pays from their paychecks are pooled and then paid out. Your contributions are supporting others and, when you retire, the money others pay into the system will support you.  

In 1960, the amount of contributing workers-to-beneficiaries was 5:1. In 2013, it was 2.8:1. So, while the number of workers paying into Social Security is decreasing, there are still more paying in than receiving benefits. As time passes and the average life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than you think they will be.

3. EVERYONE CONTRIBUTES EQUALLY TO SOCIAL SECURITY

Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), to an earnings cap of $128,400. (2) So, if you earn that amount, and your neighbor earns $5 million, you will both pay the same amount into Social Security. (3) If the earnings cap were eliminated, it’s estimated that 71% of the coming Social Security shortfall would be wiped out.

4. YOU CAN ACCESS YOUR BENEFITS AT AGE 65

Social Security benefits can be claimed anytime between the ages of 62 and 70. However, the timing of when you choose to collect these benefits will impact the total amount of benefits you receive.  

Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months are added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later.

If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned.

5. YOUR BENEFIT AMOUNT DOESN’T CHANGE

For every year beyond your FRA that you delay taking benefits, the value increases by 8% until you reach age 70. There is nowhere else you can get an 8% return guaranteed by the U.S. government! If you retire early, benefits may be about 30% less, which means you could be leaving a significant amount of money on the table.

6. SOCIAL SECURITY BENEFITS AREN’T TAXABLE

While Social Security benefits are not normally taxed, they could be taxable if you are working or have other sources of income while you are collecting benefits. If you’re receiving Social Security benefits, any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2018, the limit is $17,040. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn.

The income restrictions change in the year in which you reach FRA. That year there is a higher limit: $45,360 for 2018. Once your income exceeds that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. After the year you reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.

7. YOU CAN CHANGE YOUR MIND

A shocking 38% of people incorrectly believe they can switch their claiming strategy after they’ve made their official choice. (4) This just isn’t true. According to the Social Security website, you can withdraw your claim once within 12 months after applying, but you must repay all the benefits you received during that time. (5)

8. YOUR CLAIMING STRATEGY AFFECTS YOUR EX-SPOUSE

Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. If you are married for 10 consecutive years and haven’t remarried after your divorce, you are entitled to either your full benefit or half of your former spouse’s benefit, whichever is greater.

9. YOU CAN RECEIVE YOUR BENEFITS WHEN YOU WANT THEM

If you want your first Social Security check next week but haven’t yet applied for benefits, you are out of luck. You must file for benefits 3 to 4 months before you get your hands on your money.

AVOID A SOCIAL SECURITY HEADACHE

Social Security is a major piece of your retirement game plan. It was designed to replace 40% of an average worker’s wages, (6) and that’s money you don’t want to miss out on. There is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional.

At Archer Investment Management, our goal is to provide comprehensive financial strategies for a secure future, including a customized Social Security plan. We work hard to educate you on your opportunities, answer your questions, and offer objective guidance. If you want to maximize your Social Security benefits and plan for a comfortable and secure retirement, schedule a 45-minute phone call to learn how we can help you.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and an MBA, he is a CERTIFIED FINANCIAL PLANNER™ and CFA® charterholder. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

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(1) Social Security Myths Debunked

(2) https://www.ssa.gov/planners/maxtax.html

(3) https://www.ssa.gov/oact/cola/cbb.html

(4) http://time.com/money/4762608/social-security-strategy-retirement/

(5) https://www.ssa.gov/planners/retire/withdrawal.html

(6) https://www.fool.com/investing/general/2016/02/28/how-much-of-my-income-will-social-security-replace.aspx

Women and Disability: How To Protect Your Income

Posted on February 5, 2017 by - Smart Money Tips

We already know that women face more financial hurdles than men, especially when it comes to retirement. They earn less, (1) save less, (2) live longer, (3)  and spend more time out of the workforce to care for children or other family members. (4) Unfortunately, the obstacles don’t end there. Women are more likely to face disability than their male counterparts, but only 20% of American women are aware of this looming threat. (5)

Now that we’ve got the doom and gloom out of the way, let’s look at the silver lining. If we know the facts, we can do something about them. If we prepare ahead of time, we can protect our finances from being destroyed by the hard-hitting impact of a disability.

THE REALITY OF DISABILITY

The majority of disabilities aren’t caused by risky undertakings like skydiving or accidents that occur at work. Currently, the leading cause is arthritis (which women are twice as likely to get than men), followed by back and spine problems. Together these conditions are responsible for more than one-third of all disabilities. (6)

Less than half of Americans own disability income insurance, and 61% of women have never done any research on disability coverage. (7) As a result, this lack of protection has become a significant gap in women’s financial plans. Is there a solution to this financial dilemma?

KNOW YOUR SOURCES

Income sources, that is. Now that you’re convinced you need to take disability seriously, let’s look at the steps you can take to prepare.

Disability Insurance

Employer-sponsored plans are the most common sources of disability insurance, but only about 45% of working women are covered under this benefit. (8) If your employer offers both short and long-term disability coverage, take it, but be sure you understand the ins and outs of the plan. Group coverage generally includes only a percentage of base salary (usually 50 – 60%) and excludes income from bonuses or the value of employer-paid benefits, such as health insurance, retirement plan matching or life insurance.

The majority of group plans also have other important limitations to be aware of, such as no provisions for inflation, broad definitions of disability, and integration with Social Security. Finally, it is essential to know if your company’s benefit will be subject to income taxes. If the employer pays all or part of the premium, chances are the benefit is taxable. These limits can potentially erode the value of benefits.

If you don’t have access to disability insurance through your employer, or you are self-employed (as 7.5% of working women are (9)),  you may need to look into purchasing outside disability insurance for a premium. Whatever form of insurance you have may not cover your wages completely, but it’s better than being left with nothing but your savings account.

Emergency Fund

Women are twice as likely as men to think their cash reserves would last less than one month if they experienced a disability. (10) Creating an emergency fund equal to six months of wages would establish a solid buffer that can be used, along with disability insurance, to prevent financial ruin.  

Social Security

The Social Security Administration offers two programs to assist those with disabilities. If you have a condition that falls under their definition of a disability, have worked long enough, paid into Social Security, and have not been able to work for a year or more, you might qualify for government income. Since they only offer income assistance to people with long-term, or total disabilities, you’ll need at least a year’s worth of income from other sources before you can tap into this benefit.

PROTECT YOURSELF

Money makes the world go ‘round, whether you can work or not. Plan ahead, assess your risk, and have a strategy in place for a potential disability. Remember, what you don’t know can hurt you. Start the conversation with a financial professional to today to start planning for tomorrow. If you’d like to discuss how disability income may play a role in your financial plan, click here to schedule a phone call.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

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(1) https://www.bls.gov/cps/cpsaat37.htm

(2) Women’s Retirement Outlook Report

(3) Social Security Actuarial Life Table, 2016.

(4) Women’s Retirement Outlook Report

(5) https://womenscenter.theamericancollege.edu/sites/womenscenter/files/Disability_Fact_Sheet.pdf

(6) https://womenscenter.theamericancollege.edu/sites/womenscenter/files/Disability_Fact_Sheet.pdf

(7) https://womenscenter.theamericancollege.edu/sites/womenscenter/files/Disability_Fact_Sheet.pdf

(8) Women More Likely to Develop a Disability

(9) Self-Employment in the United States

(10) Women More Likely to Develop a Disability