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Financial Symmetry: Balancing Today with Retirement

When considering retirement, do you wonder what financial opportunities you may be missing? Busy lives take over and years pass without taking advantage. In this retirement podcast, the Financial Symmetry advisors unveil financial opportunities, to help you balance enjoying today so you are ready to retire later. By day, they are fiduciary fee-only financial advisors who answer questions about tax savings, investment decisions, and how to save more. If you’ve been putting off your financial to-do list or are just not sure what you’ve been missing, subscribe to the show and learn more at www.financialsymmetry.com. Financial Symmetry is a Raleigh Financial Advisor. Proudly serving clients in the Triangle of North Carolina for over 20 years.
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Now displaying: August, 2021
Aug 23, 2021

The Mega Backdoor Roth IRA could be the secret weapon you have yet to use in your retirement saving strategy. If you consider yourself a super saver, looking for alternative ways to save tax efficiently, this could be a great option.

This strategy is of most interest to those maxing out all other tax-efficient savings accounts. Including standard employee 401k contributions, Roth IRA, 529, and HSA. In this episode, you'll see why we call this the secret weapon for super savers, as we breakdown who the Mega Backdoor Roth is for, why you might be interested in it, and how it compares to other IRAs.

Who should take advantage of the Mega Backdoor Roth IRA?

In order to take advantage of the Mega Backdoor Roth IRA, you first have to have access to a 401k that allows after-tax contributions. These are contributions on top of your regular $19k allowable contributions to a 401k in 2019. Hence the "Mega" moniker. So if you are already maxing out your 401K, Roth IRA, 529, and HSA contributions then the Mega Backdoor Roth IRA could be a great extra additional savings opportunity. Many get confused as to why it's called a Mega Backdoor Roth IRA when we are talking about your 401k. Good question. The name derives from where the money will be after you complete the consolidation process.

You're now seeing more larger companies and solo 401ks allow for "in-service" distributions. Meaning, you could withdraw portions of your 401k savings, while still employed. The real benefit with this savings strategy, is when you can save the extra after-tax contributions and then roll them to a Roth IRA in the same year. Meaning, you could get a larger amount in to a tax-free savings account to grow for years to come.

What’s so great about the Mega Backdoor Roth?

If done correctly, the Mega Backdoor Roth can allow you to contribute up to 6X what you can contribute to a regular Roth IRA. With a regular Roth IRA, you can contribute only $6,000 per year in 2019. The Mega Backdoor Roth allows you to contribute up to $37,000 extra each year on top of your normal employee 401k contributions.

Many people don’t know this, but the limit for 401K contributions is $56,000 or $62,000 and for those over 50. Many people assume that the limit is only $19,000. But this $19,000 limit is for pretax contributions. You can actually contribute up to $37,000 more after taxes are withheld (depending on your employer match amount). You can ask your employer if they contribute to after-tax contributions. If you aren’t sure then you should contact your HR department. They may not even know about the Mega Backdoor Roth, but if you communicate with them you could get it started in your company.

What is the difference between the Mega Backdoor Roth and the regular backdoor Roth?

If your income for a married couple is over $203,000 then you are ineligible to contribute to a typical Roth IRA. Instead, you can implement the Backdoor Roth IRA strategy. But this strategy has multiple steps to assure it's done correctly which we wrote about in a previous post. To be a good candidate for this strategy, you need to first move existing pretax accounts to an existing 401K, if you have one. The next step is to contribute $6000 to a regular non-deductible IRA. After completing this, you can convert the non-deductible IRA to a Roth IRA. The issue with the Backdoor Roth is that you can only contribute $6,000 per year.

The Mega Backdoor Roth allows you to contribute much more and would be a provision of your 401k account. Essentially, it's the amount above your normal employee contributions ($19k in 2019; or $25k if over age 50) plus your employer match contributions. It’s important to consider all of your options to see if the Mega Backdoor Roth is right for your circumstances.

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Outline of This Episode

  • [2:27] Who is the Mega Backdoor Roth for?
  • [4:31] What is the difference between the Mega Backdoor Roth and the regular backdoor Roth?
  • [12:33] How do you know if you can take advantage of the Mega Backdoor Roth?
  • [17:59] What are the risks?

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Aug 9, 2021

Stock options can be one of the most lucrative benefits of your job, but they can also be a tax land mine.

Video recap: https://youtu.be/qBovTreFv7E

Our resident tax professional, Will Holt, joins us this week to help you build a framework to consider your company’s stock options.

You’ll learn 3 key strategies you can use to make better decisions for managing your stock option holdings. Including:

  1. Managing the risks and benefits around taxation for 2 types of stock options
  2. Handling the leverage and concentration risk of stock options
  3. Deciding what to do with the proceeds once choosing to exercise and sell

If stock options are one of the perks of your job, you don’t want to get bit by the tax dog, so don’t miss this episode.

What are the risks and benefits of the two primary stock options?

It is important to understand the type of stock options that you have. There are two primary types of company stock options: incentive and non-qualified. The difference between the two is how they are taxed.

Non-qualified stock options have no real risks until they are exercised since they aren’t worth anything until they are above the strike price, or “in the money.” You can exercise your right to purchase these stock options at the strike price, but they first have to vest over a period of time, typically 4 years. If choosing to exercise and not immediately sell, and the stock price is above the strike price, your shares are in the money. If choosing to sell while in the money, any gain would be taxed at ordinary income rates and come through your paystub in most cases.

Incentive stock options alternatively, offer the opportunity for preferential tax treatment compared to non-qualified stock options.  To get preferential long-term capital gains tax treatment, you must be 2 years from the grant date and 1 year after you've exercised. This is known as a qualifying disposition.

The big risk if choosing this strategy is the potential for phantom income to be taxed at AMT rates. Before you reach the 12 month timestamp, the stock price could fall dramatically. If this occurs after the end of the calendar year when the exercise occurred, you would still be responsible for alternative minimum tax due on the 'bargain element," the difference between the strike price and fair market value of the stock when exercised. It's called phantom income, because the income effectively disappears, but the tax remains on gains that are no longer there due to a sinking stock price.

Working with a professional can help you make better decisions

Understanding strategies to unwind your stock options can be complex, which is why it's helpful to work with a professional. A financial professional can help guide you through the challenging decisions that stock options present. Stock options can be a very valuable part of your net worth and you don’t want to make the wrong moves. Taxes and holding periods aren’t the only challenges that you face by owning stock options; the concentration that you might have can pose further risk.

Are your benefits putting you at risk?

The advantage of having stock options in your benefits package could end up being a sizable risk if not managed properly. You may end up holding a supersized concentration of one stock. Having your net worth tied up in one stock can lead to more risk vs. a diversified portfolio. But many people delay selling because of the potential negative tax impact of selling.

There are ways you can manage these risks. One way is to set target prices to time your exit. You won’t always make the right call, but if you set up a framework to help manage your decisions it can help take the emotions out of the sale. You’ll also want to consider the impact of your stock options on other areas of your financial plan.

What do you do with the proceeds when you have been forced to sell

There may be times when you are forced to sell before you are ready. This could be a large, infrequent income event that could change your tax situation. One of the best ways to see this impact is running a tax projection for the year.

You may be able to take advantage of tax-loss harvesting to offset some of your tax burden. If you are charitably minded, then another way to reduce your tax liability is to set up a donor-advised fund.

In the end, remember that stock options are a reward for your hard work. You don’t want to ignore them or get caught up in analysis paralysis. You can avoid this by building your decision-making framework or working with a financial professional that can help walk you through your choices.

Outline of This Episode

  • [2:14] The difference between incentive and non-qualified stock options
  • [7:40] Your concentration can be another risk
  • [11:35] What do you do with the proceeds when you have been forced to sell
  • [16:36] How are you handling your strategies?

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