If your annual household income is $200,000 or more, you have some unique financial challenges. While in many ways, you have the same needs as other people – saving for retirement, children’s college funds, and making sure that your family is insured for the various challenges that life can throw at you - you also have needs and strategies to consider that many people do not. Here are a few tips that we at the Lineweaver Financial Group suggest, and a few things to consider in your planning.
1. Concentrated Stock Positions – It’s relatively common for higher income earners to receive a significant part of their income concentrated in employer stock or options as a way to encourage employees to grow the company. While this is great as long as the stock keeps going up, there are often strict rules about selling, which can tie up your money and can over-expose your financial portfolio to the risks inherent to your industry. We usually recommend that you keep no more than 25% of your portfolio in a single stock, or, if you have to, talk to your financial advisor about how to best hedge against your position so that if something unexpected happens, you are protected.
2. Net Unrealized Appreciation (NUA) Tax Savings Opportunity - Another strategy for dealing with concentrated stock positions is to make use of Net Unrealized Appreciation, which is the difference in value between the average cost basis and the current market value of stock shares held in an employer tax-deferred account, such as a 401k. This only applies to the stock of the company for which you are or were an employee where the stock has appreciated in value. Most distributions from a 401k are taxed at your personal income rate, which can be substantially higher than the current capital gains rates. To take advantage of NUA, you will need to roll 100% of your employer stock out of the retirement plan at one time, pay personal income tax on the average cost basis of the shares at the time of distribution, and not sell any shares until after 12 months of the transfer. The remaining gains in the shares over the cost basis will remain deferred for 12 months, after which time you can then sell any or all of the shares and pay the lower long-term capital gains rates on the appreciation. There are many hurdles you need to jump through in order to get these shares to the lower capital gains rates, but the tax savings can be well worth it. Make sure you are dealing with someone who is familiar with NUA so it gets done correctly. We also recommend you consult your tax advisor to make sure this strategy is right for you.
3. Tax Harvesting – Tax harvesting allows you to offset gains with losses. First, take a look at your investments for the year, and look at where your losses can offset your gains. Also, keep in mind that mutual funds may have capital gains distributions close to year end that you can’t control from profits that the fund has received throughout the year. These could be passed through to you. Often times, fund companies will share projected estimates, which will allow you to take those taxes into account as you do your year-end planning.
4. Consider Social Security and Medicare – You might have heard that Medicare will be exhausted in 2024 and that Social Security will only have enough income to pay about 75% of their guaranteed benefits beginning in 2033. If you’re also in a high tax bracket (usually considered 28% or above), then you will likely have increased costs for Medicare and health expenses, and may receive even less than that 75% projection.
5. Banking – $250,000 is the current limit at any one bank that the FDIC will insure per depositor, per FDIC-insured bank, per ownership category. If you prefer to keep everything at one bank, make sure that your accounts are spread across ownership categories, and across family members. For example, you and your spouse can each have an account, and can each have an IRA, and Roth IRA, which, at $250,000 each, would allow you to have $1.5 million of your most valuable assets insured at one bank.
These are just a few of the many strategies that high-income earners may employ to maximize benefits, better protect their income and families, and minimize taxes. Stay tuned as we share more in the coming weeks! In the meantime, you can contact us with any questions at no obligation – simply click here, email us at email@example.com, or call us at (216) 520-1711.