Investing

How Do Restricted Stock Units Work?

A question I often get from clients and friends – “I have these things called Restricted Stock Units (RSUs)what are they and how do they work?”

An RSU is a contractual right to receive company shares or an equivalent cash payment at some point in the future. They are an increasingly popular form of equity award offered by companies of all shapes and sizes. Many companies here in the Raleigh-Durham area have shifted to RSUs because they are administratively convenient, are “easy” for employees to understand, and can be structured in a way that helps attract and retain key employees and drive performance.

So with that in mind, let’s take a closer look at what RSUs are and how they can work for you.

You’ve been granted RSUs: Now what?

If you’ve been granted RSUs, congratulations! It’s most certainly not a bad thing! You have likely been given this equity award because you are valued, and your employer wants you to stay with the company and meet certain performance benchmarks. But it’s important to understand that your employer has merely promised to deliver shares (or an equivalent cash payment) to you at a future date. As such, RSUs can be thought of as a form of deferred compensation.

You do not owe any tax at the time of the RSU grant. In fact, you will not owe tax until you actually receive the shares. RSUs typically come with a vesting schedule, and there may be performance conditions that must be satisfied before the stock can be delivered. Unlike a stock option, your RSU has intrinsic value; whether the value of the company increases or decreases after the grant, the stock will have value and can never be “out of the money.”

What happens when RSUs vest?

Once RSUs vest, they will be delivered to you and you will recognize ordinary income based on the fair market value of the stock at the time of delivery. Unlike with stock options, no analysis regarding when to exercise is needed. In most cases, the employer will withhold shares in order to cover the tax, delivering the net shares to you. You may have additional options for withholding, you may be able to elect to receive cash instead of stock, or you may be able to defer the delivery of the shares beyond the vesting date. Be sure to check your plan document to ensure that you understand all of your options.

Once you own the employer stock, you are free to hold it or sell it immediately. Your cost basis in the shares is the fair market value on the date they were delivered. So, if you sell the shares immediately, there will be no additional taxable gain. But if you choose to hold the shares and sell them down the road? You would pay capital gains tax on any gains earned since you acquired the shares; if the shares decrease in value, you would have a capital loss that you can use to offset other capital gains.

Planning questions you should be asking

 

·       Should I hold or sell?

·       What happens if I leave the company?

·       What if I’m planning to retire?

·       What’s the risk?

·       Will I be pushed into a higher tax bracket?

 

A valuable benefit

RSUs can be a valuable piece of an employee benefits package, especially when they are incorporated into a financial plan. As you can see – there are lots of moving parts and several important questions that need to be reviewed. Working with a financial advisor and tax professional can help you plan accordingly and make the most out of your RSUs.

Still confused or want to talk about your situation – contact us and we’d be happy to schedule a time that is convenient for you.

How Will Tariffs Impact Your Investments?

I know this may come as a shock, but fundamentally, the topic of tariffs is actually good. Government leaders implement tariffs on foreign products and services to restrict imports by tacking on additional taxes or fees. The goal is to make foreign products less attractive to domestic consumers.

Tariff supporters argue that they helps correct trade inequities and boost domestic production and growth. They believe that well-targeted tariffs foster fair trade and create a more open and robust international marketplace, despite the tension in the short run.

Those against the idea argue that establishing tariffs is a highly arbitrary fix to flaws in a very complex international market that will lead to unnecessary and unproductive trade wars that historically have ended tragically.

What's Going On Now?

 
  • President Trump has threatened to implement tariffs on nations to correct trade imbalances, unfair exporting practices and marketplace offenses.
  • Trump imposed tariffs on Chinese goods as punishment for the country’s intellectual property theft.
  • The U.S. trade deficit with China has reached a record high of more than $375 billion.
  • Trump has also instituted tariffs on steel and aluminum shipments from Canada, Mexico, and the European Union.
 

Who Will It Help? Who Will It Hurt?

First, who is expected to gain from the U.S. policy on tariffs?

 
  • U.S. steel producers stand to gain significantly. The 25% steel tariff makes a strong argument to go for domestic steel.
  • The U.S. aluminum market has been growing with the implementation of tariffs.
  • Foreign firms serving the markets affected by U.S. tariffs may benefit.
 

Second, who is expected to get the short end of the tariff stick?

 
  • American whiskey exports may suffer. U.S. whiskey producers shipped $737 million in bourbon to Europe in the 12 months prior to March 31.
  • Harley-Davidson and other U.S. motorcycle manufacturers say tariffs will put the brakes on production.
  • Prices for beer and soda, in aluminum cans, may rise.
 

Tariff Impact on Stock Market

Tariffs—and the potential for a trade war—will loom heavy on the stock market, most analysts believe. But by how much, to what extent, and in what direction remains unanswered.

Investors, at this point, are breathing a little easier, as the U.S. stock market seems to be adjusting to the news of the tariffs. Traditional wisdom suggests trade wars don’t produce positive, short-term results. However, Trump’s reasoning rests on the premise that vast trade imbalances favoring foreign countries has unfairly put the brunt of global economic development on U.S. shoulders.

While U.S. stocks have largely climbed to unprecedented heights following Trump’s “Tax Cuts and Jobs Act” and other economic incentives in late 2017 and early 2018, the market has undergone some remarkable shifts, including the sudden 12% drop in February 2018.

We help our clients wade through the challenges and opportunities of the market, on both the personal and professional levels. When you invest in developing a relationship with an independent financial professional, you invest in your future.

Contact us today to learn more!

 

Certain sections of this commentary contain forward-looking statements based on reasonable expectations, estimates, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

Is a 529 the Best Way to Save for College?

For parents with aspirations of sending their children to college, the costs associated with doing so can be daunting. For decades, the price of higher education has risen at a rate close to three times that of the Consumer Price Index. And although the rate of increase recently has subsided to some degree, this expense continues to be among the most significant faced by parents. 

Let's consider the following statistics:

 
  • According to Trends in College Pricing 2017 produced by The College Board, a nonprofit organization serving students and schools, the average published tuition and fees for in-state students at public four-year colleges and universities for 2017–2018 are $20,770.
  • In addition, the study states that the average published tuition and fees at private four-year colleges and universities for 2017–2018 are $46,950.
 

There is no question that the pursuit of higher education will come at a substantial cost.  You may be searching for the best way to save for that moment when your child leaves home and the bills roll in. To celebrate National 529 Day, let's take a closer look at 529 plans and their effectiveness when it comes to saving for college.

What is a 529 plan anyway?

Excellent question and probably a great place to start! A 529 plan is a qualified tuition savings program listed in section 529 of the Internal Revenue Code. While these plans are governed by federal law, the 529 plan itself is sponsored by the individual state and managed by a mutual fund company that provides the underlying investment choices for the plan. If the state savings plan meets the federal requirements, the plan’s balance and the future distributions from the plan receive favorable tax treatment.

Income tax benefits

A 529 plan provides some very nice tax benefits, with the primary benefit found in the tax treatment of contributions, earnings, and distributions. Contributions to a 529 plan are typically invested in a mixture of stock and bond mutual funds. Similar to an IRA, the earnings on the contributions are tax deferred; however, unlike a traditional IRA, distributions from the 529 plan are tax free, as long as they are used to pay for qualified higher education expenses.

Qualified higher education expenses are defined as expenses incurred for the enrollment and attendance of a full- or part-time student at an eligible educational institution. Common qualifying expenses for both full- and part-time students include tuition, books, supplies, and associated fees.  For a detailed list of what is included, visit www.savingforcollege.com

The Tax Cuts and Jobs Act of 2017 includes an expansion of 529 savings plans that allows families to save for K−12 expenses as well as college expenses. 529 plans will be able to use qualified distributions of up to $10,000 per year, per student, for elementary and secondary school expenses.

The effect on financial aid

529 plans not only provide substantial income, gift, and estate tax savings, but they also often have minimal effects on financial aid. 529 plans owned by parents are considered parental assets; this means they are assessed at a rate of 5.64 percent when determining how much a family is expected to contribute to tuition costs. Plans owned by students are considered student assets; student assets are assessed at a much higher rate of 20 percent. Qualifying distributions from 529 plans also receive advantageous treatment when determining eligibility for the subsequent year of financial aid. 

A wise choice

When considering all of the options available to parents, a 529 plan offers the most beneficial means to save for college. Tax deferral on the growth of underlying investments, tax-free withdrawals for qualifying higher education expenses, the possibility of a state income tax deduction, the low impact on eligibility for financial aid, and the gift and estate tax benefits make a 529 plan an excellent vehicle for saving toward higher education goals.

If you'd like to discuss what makes the most sense for you, please don't hesitate to give us a call. 

 

The fees, expenses and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10% penalty. By investing in a plan outside of your state residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance and administrative/management fees and expenses.

What is the Big Deal with Bitcoin?

I certainly wasn't surprised when I started getting the "should I buy Bitcoin" questions - the media attention alone drives people to it. The troubling part though, is in many cases these questions are coming from people who aren't following any of the basic personal finance principles.

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.
                                                   - Warren Buffett

Easily one of my favorite quotes from Warren Buffett and for good reason - investor behavior never fails!

"Cryptocurrency" is arguably the most popular buzzword in the global economy right now. While Bitcoin is currently the most well-known cryptocurrency, most people don't understand it beyond the hype and reported skyrocketing value.

The overarching goal of any cryptocurrency is to replace cash, credit, and electronic wire transactions with a digital medium of exchange that isn’t issued by any bank or backed by any federal government.

Small Transactions

Bitcoin was originally viewed as an ideal system for small online transactions, like credit card fees. However, because those online fees are too expensive for retailers—plus with a limited supply and varying demand—Bitcoin’s real-world application has been hampered. To date, only a few established retailers will accept Bitcoin as a form of payment. Among them, you'll find names such as Overstock, Expedia, Newegg, and Dish Network.

Scarcity

Bitcoin’s high level of scarcity has partly influenced its reported high market value. Although you can purchase Bitcoin using online cryptocurrency exchanges, Bitcoin was originally earned via a process known as mining, which is basically a lottery system using a specialized computer program. This lottery system favors those with the biggest and fastest machines, which means people will always need better programs and higher Bitcoin prices to make mining worthwhile—leading to its scarce supply.

The Influence of Cryptocurrency

At this time, it’s hard to tell how much cryptocurrencies are influencing the markets. There are currently at least six other forms of cryptocurrency worthy of attention in the marketplace—and in recent months and years, upwards of 3,000 other cryptocurrencies have been developed and released since Bitcoin was created. However, many of them died out due to a lack of interest and use.

The Future of Cryptocurrency

Governments around the globe are looking at the potential for regulating cryptocurrencies. At the moment, Bitcoin is controlled by a global network of computers that track all purchases and transactions through a system known as Blockchain.

Blockchain keeps Bitcoin decentralized, making it hard for governments and regulatory bodies to control it and other cryptocurrencies. The decentralized nature of Bitcoin, plus its surging value, is diminishing its chances of becoming a more widespread currency. At the moment, most people are turning to Bitcoin as a means of investing with hopes of a big payoff, rather than using it in commercial transactions.

Reports of investors who bought Bitcoin early and generated wealth has led to droves of people precariously investing in the cryptocurrency based on emotion and fear of missing out. As with any investment, there is risk involved with investing in cryptocurrency, and no one can predict its future value.

It’s important to keep an eye on your long-term goals, and before investing in cryptocurrencies, talk to a financial planner to make sure your investment aligns with your financial plan. 

 

This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.

The Powerful Effects of Compound Interest

Getting an early start on your retirement savings may end up being one of the best financial moves you can make for yourself and your family. Thanks to the power of compound interest, you have the opportunity to make your money work for you and grow exponentially in many cases on a tax-deferred basis.

Think of interest as a fee paid for using borrowed money. The original amount of money in your  account (without added interest) is known as the principal. Compound interest is beneficial because it’s calculated based on the principal plus the interest, resulting in greater interest accrual over the life of the investment.

The benefits of saving early and often

Let’s look at the investing choices of two hypothetical investors, Amy and John.

 

Amy

Amy started investing at age 25. She invests $3,600 per year for 15 years at an 8-percent interest rate and then stops. At age 40 her account has grown to $104,500. By age 70 her investment has grown to $1,050,000.

John

John didn’t start investing until he was 40. He invests $3,600 per year for 30 years at an 8-percent interest rate. At age 40 he has $0 in his account. At age 70 his account has grown to $450,000

 

Clearly this is for illustrative purposes only.  The figures above do not represent the performance of any specific investment and assumes no withdrawals, expenses and tax consequences.

By now you're probably saying, “Okay, I get it. Saving earlier is better than later.” While this is a key point (and one you’ve probably heard before), many people don’t realize just how important it is until they fall into financial trouble. After all, many things can get in the way of retirement saving besides procrastination, such as paying off a mortgage, car loans, sending kids to college, and unexpected injuries or illnesses. The best way to be prepared is to kick off a pattern of saving and take advantage of compound interest as early as you can.

Retirement Readiness

Although retirement may be the furthest thing from your mind at this point, recognizing how costly it can be may help you stick to a savings plan. Here’s an overview of some of the expenses that may come into play:

 

Income taxes. When you begin withdrawing funds from retirement accounts, you may lose more of your financial “nest egg” than you thought possible to income taxes.

Everyday expenses. Groceries, home maintenance and insurance, utilities, and other basic living expenses can eventually start to chip away at your savings.

Travel and hobbies. Many retirees want to travel and take up new hobbies (after all, this is what retirement should be about). Unfortunately, such dreams may not happen if you haven’t saved enough to cover the more crucial expenses highlighted above.

 

Ready to start saving big?

Clearly, getting an early start on your retirement savings (and sustaining that habit over time) can greatly improve your future financial stability. To see how much your money could grow, schedule a free consultation with us here.

Six Reasons You Need More Than A Robo-Advisor

You may have read about the rise of so-called “robo-advisors”, online investing platforms that use computer-generated algorithms to create strategies and manage your money.

These platforms provide simple portfolio management with very little human interaction at rock-bottom prices. With the increasing popularity of these platforms, you might be asking yourself: Do I even need a financial advisor?

I think you do. Here are 6 reasons why:

 

Reason 1 | We Treat You like a person, not just an account number

We put you at the center of everything we do. Our meticulous discovery process thoroughly drills down into your unique personality, goals and needs. We think clients have better financial outcomes with custom-built strategies. Robo-advisors use algorithms to fit you into pre-existing strategies based on your age, risk tolerance, and investment horizon. They can’t fully understand your unique needs because they’ve never met you personally.

Reason 2 | We keep you involved in investment decisions

We emphasize ongoing, personalized communication because we believe informed clients make more intelligent financial decisions. We customize our level of communication to your desires and present you with as little or as much technical detail as you would like. Robo-advisors are targeted towards clients who prefer a hands-off approach to investing – one that does not allow for talking through things face-to-face.

Reason 3 | We coach, guide and hold you accountable

Everyone has different purposes for their money; we help you define it and hold you accountable to the strategies we create together. Think of us as a real-life financial coach. Robo-advisor algorithms are designed around simplistic variables like age, target retirement date, risk tolerance and income level. A computer doesn’t care if you reach your goals.

Reason 4 | We Make Sure Your Financial Strategies Keep up with your life

We proactively monitor your strategies and update them as your needs change. When you pass one of life’s important milestones, we’ll know and make sure your strategies keep up with your life. Robo-advisors use automated re-balancing algorithms to make changes to your portfolio. They don’t know when you get married, have a child, or buy a house.

Reason 5 | We provide knowledgeable answers from someone you know

We offer you easy access to an experienced professional who knows you and understands your situation. Whatever your issue, we can get you the answer you need, quickly and confidently. Most robo-advisors send you to a help forum or customer service center when you have questions. Even if there is a person assigned to your account, you could be just one of hundreds they speak with every day.

Reason 6 | Your life is about more than investing

We help our clients prepare for all of life’s important financial milestones: a house, paying off debt, funding a college education, a bucket list, vacation, as well as retirement. Robo-advisors are designed to focus mostly on investing. For our clients, comprehensive wealth strategies are about much more than just their investment portfolio.

 

The Bottom Line

The good news is that you don’t have to forego the benefits of working with an online investing platform when you work with us. Wealth Wise was designed to utilize robust technology to offer many of the same features and benefits that our online competitors do, but with human interaction you deserve.

Want to talk about how we can help you do more with your financial life?


Click here to schedule a meeting

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Should You React To Stock Market Volatility

The best answer is "No", but that’s not always the easiest.

As you know the markets started 2018 with the wind in their sails, and we all watched as indexes continued their nearly straight-up trajectory from 2017.

Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February. On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant. The next day, all 3 indexes posted positive returns.

I understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. My goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life. 

Putting Performance Into Perspective

When markets post dramatic losses, many people wonder what causes the turbulence—and may assume negative financial data is to blame. However, that wasn’t the case with the recent selloff. 

No negative economic update or geopolitical drama emerged to spur the selloff. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline.

While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.

Volatility Facts

 

Average Intra-Year Declines: Since 1980, the S&P 500 has experienced an average correction each year of approximately 14%. But in 2017, the markets were unusually calm, fluctuating only 3%. Before this recent decline, the S&P had gone more than 400 days without losing over 5%—its longest span since the 1950s.

Takeaway: Markets fluctuate, and the recent lack of volatility is what’s truly unusual.

Percentages vs. Points: Many news articles mention that the Dow’s 1175-point drop on February 6 was its highest decline in history. While this statement may be true, it leaves out a key detail: The higher an index goes, the smaller a percentage of its total that each point represents. In other words, 1175 points doesn’t have the same impact at 25,000 that it does at 10,000.

Takeaway: Focus on percentages not points to gain a clearer view of market performance.

Recovery From Bad Days: The S&P 500 fell 4.1% on February 5, but within one day, the index regained 1.7%. This performance surpasses historical data. If you analyze the S&P 500’s 15 worst days—where the index lost an average of 8.16%—stocks were still in negative territory 1 day later. But, in 13 instances, stocks were back up within a year by about 21%; they were always in positive territory 5 years later.

Takeaway: Even when stocks lose more ground than they just did, they recover and positive performance returns.

 

Remembering The Last Market Correction

In August 2011, the S&P 500 lost 6.66% in one day. At that time, the European debt crisis was in full swing, the U.S. had lost its AAA credit rating, and the financial sector was reeling.

Facing that situation, impulses to leave the market and avoid further losses could have arisen. As is so often the case, however, staying invested paid off.

Only a year later, the S&P 500 had gained over 25%.

Knowing Where to Go From Here

Over short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long term, however, economic fundamentals drive the markets. The reality is that equities don’t move in a straight line. Even if volatility is here to stay, we know that price changes can provide new market opportunities.

I encourage you to focus on your long-term goals, rather than short-term fluctuations. Don’t allow emotions to derail your plans. You should feel comfortable in your financial journey. If you don’t have a financial plan in place – please feel free to contact me and I’d be happy to help you get started.