One of the most valuable benefits a financial advisor provides is helping your family develop a concept of “surplus.” Well, now you’re probably thinking, “What exactly is a surplus?” By definition, it is the income you can freely use each year without negatively affecting your financial goals.
For most people, savings in their employer 401(k)s may not be enough to reach their families’ retirement goals, college savings goals, etc. Often, there is a need to save money beyond their employers’ retirement accounts.
At Living Your Wealth, one of our primary focuses is to help every one of our clients identify, at minimum, how much their annual savings target needs to be to reach what is essential to them. After that, any cash left over is all bonanza or your surplus! Extra vacation? Book it, first class! Spa day(s)? You bet! Want to retire early? Invest!
RSUs (Restricted Stock Units)
If you work for the government, you usually have a pension(s) which helps bolster your income in retirement. Additionally, self-employed business owners often save within a tax-deductable SEP IRA, allowing for a very high maximum annual contribution ($66,000 in 2023, subject to certain limitations).
However, over 90% of Living Your Wealth’s clients are tech professionals, and some of these strategies are unavailable to them. The industry adds another layer of complexity by compensating a high percentage of income in company stock, a practice rendered even more confusing by the various types of stock compensation one can receive: Incentive stock options (ISO), Non-Qualified Stock Options (NQSO), Restricted Stock Units (RSU), Employee Stock Purchase Program (ESPP)?? There are enough abbreviations to make you feel like it is an entirely different language.
Today, I will focus on one of the most commonly seen forms of stock compensation, Restricted Stock Units. Depending on the company you work for, stock compensation can range from as little as 5% of your total gross income to 60%, 80%, or even multiples of your salary.
So what do you do if you are paid mostly in stock but do not want to sell every share? Here is where the concept of surplus plays a significant role in your financial plan. It is perfectly understandable for someone to be emotionally attached to their employer’s stock. You show up daily, work hard, understand company goals, and have strong relationships with coworkers. You would not believe in the company if you did not work there!
I will be the first to say that, for most people, you may not have to sell all your company stock! If you build your budget and find that your base salary leaves zero surplus or even a deficit, selling enough stock to cover your budget and meet additional savings needs may be the case.
Here is how it works for Living Your Wealth clients. Once we have identified your goals and objectives, we help you develop a plan to determine just how much you would need to save annually to achieve what is important to you. If you do not have experience selling stock, we develop a schedule that aligns with trading windows to walk through the trading process and answer questions before you place any trades. Whatever stock remains can be invested for the long term or sold to fund upcoming vacations, home purchases, etc. At least annually, we will review stock concentration targets to ensure your financial plan does not take more risk than you are willing to. This approach helps our clients develop financial confidence.
PRO PLANNING TIP
If your company has seen considerable growth over the past 1, 3, 5, or 10+ years, pulling the trigger on selling such well-performing stock could be challenging. A common myth is that you will pay more tax if you sell shares you have just received. Most often, when you receive an RSU stock vest, a “sell-to-cover” transaction occurs in that a percentage of the vest value is sold and withheld for income taxes. This is why you might vest 100 shares but only receive 70-80 in your account; the remaining 20-30 are automatically sold and sent in for taxes. The most tax-efficient time to sell shares is immediately when they vest. This is because the shares vest at the current market price (NOT the price at grant); there may be minimal gain or appreciation in the stock, but consult with your tax advisor prior to the transaction.
PRO PLANNING TIP
Many investment accounts only allow for cash contributions, so you will likely need to sell RSUs to fund these accounts, such as a Roth IRA. If you want to hold on to company stock, many firms allow the stock to be purchased in these accounts, offering significant tax savings on growth! Of course, your financial advisor will likely recommend diversification because as long as you work for that company, there is a high probability that you will be paid with employer stock.
Why Living Your Wealth
When searching for a financial advisor(s) you can count on, consider Living Your Wealth. Our focus is solely on tech industry professionals and how to provide them with financial planning services; the Living Your Wealth team of professionals can reliably advise you on what to do with your complex financial situation — without all the buzzwords. Start your journey with Living Your Wealth today!
Investing involves risks, including the loss of principal.
Living Your Wealth and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.
Securities are offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Western Wealth Management LLC, a registered investment adviser. Living Your Wealth LLC and Western Wealth Management LLC are separate entities from LPL Financial.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax