I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.
Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.
Mistake #1 – Not Optimizing Benefits
We all are familiar with the paradox of choice. Most people, when faced with a long list of complicated benefits that even some financial professionals struggle to understand, will focus on the areas that are familiar and disregard the rest. Who wants to spend their free time reading about ESPP taxation or the mechanics of Roth Conversions on after-tax 401(k) contributions? Chances are that if you work for a growing tech company, you have very little free time to begin with.
While it may not be the most enjoyable use of your evenings or weekends, I can’t emphasize enough how valuable it is to invest the time to learn how to optimize your benefits now. Choosing to invest additional savings in your Mega Backdoor Roth 401(k) over a taxable brokerage account may shave a couple of years off your retirement date. Maximizing HSA contributions and investing the growing account balance can provide for a substantial amount of money to pay for high healthcare costs if you retire before you are Medicare eligible (age 65). Making strategic Roth Conversions during lower income years, such as in early retirement or during breaks from paid employment, can save hundreds of thousands of dollars in future taxes over the course of your lifetime. The list goes on, trust me.
If I don’t exercise for a week, or even a month, I probably won’t notice a significant difference in my overall health. If I keep telling myself that I’ll start a workout routine, but years go by without investing my time and energy into making the plan a reality, my physical fitness will take a toll, and I will also lose out on all the amazing benefits that exercising regularly provides. I may look back with regret at some point later in life that maybe certain health issues could have been minimized or prevented if I had spent the time to prioritize what is truly important. It is critical to think beyond how something may impact us in the short term and recognize the long-term impacts of choosing to continue to put something on the back burner. Ask yourself, what impact will this have on my life if I wait a year to prioritize my personal finances? What effect will it have on my life if I wait ten years to prioritize my personal finances? Chances are that impact is even greater than you think. If you want help assessing and optimizing your benefits, don’t hesitate to reach out to me.
Be sure to read our upcoming blog posts for additional mistakes to avoid as a tech professional.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our fifth of six installments on how the SECURE Act could impact you.
I set up a trust to protect this money for my children after I pass. What impact will the SECURE Act have on this?
If you have significant retirement plan assets, you may have considered naming a trust as the beneficiary of your IRA. Trusts can provide asset protection from creditors and ensure that beneficiaries cannot receive all inherited assets at once. This aspect of control is appealing to many parents or grandparents who want assurance their heirs won’t be able to quickly spend down an inheritance. Previously these trusts would have been set up as pass-through or conduit trusts that allowed Required Minimum Distributions (RMDs) to pass through to the beneficiary over the course of their lifetime.
Under the new rules of the SECURE Act, most non-spouse beneficiaries are no longer subject to yearly RMDs, but they are required to distribute all funds by the end of year 10. there are no RMDs for most non-spouse beneficiaries until year 10. Conduit trusts would now hold IRA assets within the trust for 10 years and then distribute the entire account balance at once at the end of the 10 year period. This means that trusts previously set up to protect children or grandchildren from having access to inherited IRA assets all at once no longer serve this purpose. There are also significant tax implications to all assets being paid out as income in one year.
If it is important to you that beneficiaries receive an inheritance over a longer period and not all at once, there are a couple of strategies you might consider:
A discretionary or accumulation trust can retain IRA funds, even after 10 years. The downside is that income retained within these types of trusts are taxed at high trust tax rates. However, this is a potential solution if control of assets is much more important than minimizing taxes.
Some are turning to life insurance products as a way to leave assets to a trust. Since there are no RMDs and the proceeds are tax-free, this option provides a lot more flexibility around how funds are distributed.
If you’ve named a trust as a beneficiary to an IRA, we recommend reviewing your estate plan with an attorney.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
You may have heard about the significant tax and retirement reforms recently signed into law under the catchy name Setting Every Community Up for Retirement Enhancement (SECURE) Act. These sweeping changes were drafted to promote increased retirement savings by expanding access to retirement savings vehicles, broadening options available inside retirement plans, and incentivizing employers to open retirement savings plans for their employees.
Some of these changes have a much wider impact than others, but here is a summary of the key takeaways and provisions of the SECURE Act most likely to affect you.
The age to begin required minimum distributions (RMDs) increased from 70 1/2 to 72. The later RMD age of 72 will only apply to those turning 70 1/2 in 2020 or later. Anyone who turned 70 1/2 in 2019 will still be subject to the original RMD rules. While not a huge delay, individuals could benefit from an extra year and a half of compounding returns if they choose not to withdraw funds from their Traditional IRA. It can also provide additional time to make strategic Roth conversions while in a lower tax bracket. It is important to point out that the Qualified Charitable Distribution age has not changed, so QCDs can still be made starting at age 70 1/2.
The maximum age to contribute to a Traditional IRA has been removed. You may now contribute to a Traditional IRA even if you are over 70 1/2. This is a great benefit to those continuing to work into their 70s, as contributions to a Traditional IRA are tax-deductible. After your RMDs have started, continued contributions allow for an offset of the taxable income realized from these required IRA distributions.
The Stretch IRA rule, allowing non-spouse beneficiaries to “stretch” distributions from an Inherited IRA over the course of their lifetime, has been eliminated. This provision, enacted as the funding offset for the bill, requires that non-spouse beneficiaries distribute all assets from an Inherited IRA within 10 years of the account owner’s passing. Spouses, chronically ill or disabled beneficiaries, and non-spouse beneficiaries not more than 10 years younger than the IRA owner will still qualify to make stretch distributions. Minor children will also qualify for stretch distributions, but only until they reach the age of majority for their state (at which time they would be subject to the 10-year payout rule). These new rules only apply to inherited IRAs whose account owner passed away in 2020 or later.
This change will have the most significant impact on adult children inheriting IRAs, who now will have to recognize income over a 10-year period instead of over their lifetime. For those still in their prime working years, this may mean taking distributions at more unfavorable tax rates. Trusts named as IRA beneficiaries also face their own set of challenges under the new law. Many are now questioning whether they should start converting Traditional IRA assets to a Roth IRA, or significantly increase conversions already in play. Unfortunately, there’s not a one-size-fits-all answer to this question. It’s highly dependent on a number of factors, including current tax brackets, potential tax brackets of future beneficiaries, and intentions for the inherited assets. We’ll explore this and additional estate planning concerns and strategies in more depth in future articles.
Here are a few other changes that are worth mentioning:
Penalty-free withdrawals of up to $5,000 can be made from 401(k)s or retirement accounts for the birth or adoption of a child.
529 accounts can now be used to pay back qualified student loans with a lifetime limit of $10,000 per person.
Tax credits given to small businesses for establishing a retirement plan have been increased.
A new tax credit will be given to small businesses adopting auto-enrollment provisions into their retirement plans.
Liability protection is provided for employers offering annuities within an employer-sponsored retirement plan.
If you have questions or concerns about how the SECURE Act impacts you, please reach out to your financial advisor or contact us for assistance.
It’s the start of a new year, a new decade even. For a lot of us it means setting new intentions or revisiting goals that may have been forgotten. It also means having to fight for a treadmill at the gym (at least for the next month or so). As you think about the year ahead, what resolutions or intentions are you setting in your financial life?
Here are a few tips on the best way to create and stick to a resolution, according to science:
The more specific the better.
Saying you will save more is too vague to be able to gauge your success. Most likely you’ll lose track of your progress and abandon this resolution at some point in the year. Try creating goals with specific metrics you can track, like “I will increase my contribution to my 401(k) from 5% of salary to 8%.” Or if you’re saving for a specific goal, like a down payment, determine a specific amount to set aside per month.
Set yourself up for success.
Ask yourself how likely you are to meet the resolution you set. If the percentage is below 75%, consider making the goal more achievable. If you want to pay off all your debt by the end of the year, you may get discouraged if an emergency expense comes up and you aren’t able to meet your goal despite your best effort. Instead, try setting an amount to put towards your student, car, or home loan that you feel confident you can maintain throughout the year.
Knowledge is power.
Many people draw a blank when asked how much they spend each month. Trying to budget without knowing what current spending looks like is a bit like trying to lose weight without actually tracking your weight. Reviewing your spending each month and understanding where your money is going will make you a more conscientious consumer. There are many great free online budgeting solutions that you can start using now.
Associations are powerful. We avoid things we don’t want to do and, in the process, those tasks can start to pile up and feel more burdensome to even start. Take some of the doom and gloom out of working on your finances by making the process more enjoyable. Have a special treat or drink while you budget. Play some of your favorite music while you review your retirement account. Tackling your finances in smaller, more frequent chunks of time will also make the process more palatable.
Ask for help.
Sometimes we get stuck, and that’s okay. If you have a financial advisor, leverage them as a resource to get guidance when needed. Often, we just need a little nudge in the right direction to get back on track.