BY MARCUS IWIG, CFP®, CPA, MAcc Lead Advisor
The key to success is creating a plan that integrates all of your benefits and is designed to help you achieve your goals. Having a clear understanding of all types of compensation, savings tools, and other benefits along with knowledge about tax law as it pertains to your situation now and in the future, will help you construct a financial plan that gives you the opportunity for success. Here are four keys to consider:
Utilizing traditional benefits
Most executives have access to many types of benefits. The reality is that there’s a priority when it comes to utilizing these benefits. Think about maximizing these traditional savings plans first, before utilizing others:
|Plan Type||2019 Contribution Limit|
|401(k) Plan||$19,000 ($25,000 if you are over 50)|
|Health Savings Accounts||$3,500 single, $7,000 family (additional $1,000 if 55 or older)|
|Non-Qualified or After-Tax Brokerage||Unlimited|
The reason for maximizing these first is that they belong to you and can’t be taken away. Other types of executive benefits or savings plans can be taken away under certain circumstances or have unfortunate consequences if you separate from the company earlier than expected.
It’s common for executives to be offered multiple types of equity compensation. This can come in different forms, from company matching in your 401(k), to multiple types of stock options, to restricted stock units. It’s critical to understand how these benefits operate.
Common mistakes with equity compensation include:
- Failing to monitor and track vesting schedules (when benefits will be available and taxed).
- Failing to understand SEC reporting requirements for ownership and the steps needed to transact on company stock.
- Missing opportunities to diversify.
- Missing tax planning opportunities during higher income years due to vesting of equity compensation.
Executives need to be mindful of the tax implications, regulatory requirements, and diversification opportunities among other things, and all of this needs to be connected to your financial plan.
Non-Qualified Deferred Compensation
Deferred compensation plans can be powerful tools for wealth accumulation and tax mitigation. However, it’s important to understand the intricacies of how your company plan works. Non-Qualified Deferred Compensation (NQDC) plans have a risk of forfeiture. When you defer income utilizing a NQDC Plan, the assets are usually held as a part of the company’s general fund, and the company agrees to pay you the deferred compensation at an agreed upon time. If the company can’t meet its obligations, there’s a good chance that your deferred compensation could disappear.
Key questions to consider when thinking about utilizing your deferred compensation plan:
- Have you first maxed out your traditional savings plans?
- What stage of your career are you in? Many plans force the payout of deferred compensation when you separate from the company. If you think you have a career move left, you may want to limit what you put in the plan.
- To what time are you deferring the income? Deferring compensation to higher tax years negates the benefit of the plan. Consider deferring compensation out to retirement or for specific things like education costs.
- How are you investing the funds? Since you know when the income is coming back to you, consider an allocation that creates liquidity at the right time.
Executives tend to accumulate wealth quickly. Keeping up with the insurance needs as they relate to your earning power and wealth accumulation can be challenging. Make sure you and your financial advisor monitor and adjust these key coverages:
- Life Insurance – Since executives have multiple forms of compensation, it’s important to factor those in when developing a strategy for life insurance.
- Disability – An executive needs to understand the intricacies of their disability policies. A common mistake is only focusing on the dollar value of the coverage. It’s important to look at other details of the policy, like the definition of earnings, how disability is defined, and what happens if you have a partial disability.
- Umbrella Coverage– While in most cases employer sponsored retirement plans and, in some states, homes are protected from creditors and lawsuits, other assets may be at risk if you were to be sued.1 Increasing your umbrella insurance policy as your assets increase is critical to protecting your wealth and family.
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