Retirement Savings

Merging Your Money When You Marry

If you’re newly engaged or just tied the knot – Congratulations! Getting married is exciting, but it can also come with several challenges. One challenge that you and your spouse will have to face is how to merge your finances. Planning carefully and communicating clearly are important, because the financial decisions that you make now can have a lasting impact on your future.

Discuss your financial goals

The first step in mapping out your financial future together is to discuss your financial goals. Start by making a list of your short-term goals (e.g., paying off wedding debt, new car, vacation) and long-term goals (e.g., having children, your children's college education, retirement). Then, determine which goals are most important to you. Once you've identified the goals that are a priority, you can focus your energy on achieving them.

Prepare a budget

Next, you should prepare a budget that lists all of your income and expenses over a certain time period (e.g., monthly, annually). You can designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying the bills. If both you and your spouse are going to be involved, make sure that you develop a record-keeping system that both of you understand. And remember to keep your records in a joint filing system so that both of you can easily locate important documents.

Begin by listing your sources of income (e.g., salaries and wages, interest, dividends). Then, list your expenses (it may be helpful to review several months of entries in your checkbook and credit card bills). Add them up and compare the two totals. Hopefully, you get a positive number, meaning that you spend less than you earn. If not, review your expenses and see where you can cut down on your spending.

Bank accounts--separate or joint?

At some point, you and your spouse will have to decide whether to combine your bank accounts or keep them separate. Maintaining a joint account does have advantages, such as easier record keeping and lower maintenance fees. However, it's sometimes more difficult to keep track of how much money is in a joint account when two individuals have access to it. Of course, you could avoid this problem by making sure that you tell each other every time you write a check or withdraw funds from the account. Or, you could always decide to maintain separate accounts.

Credit cards

If you're thinking about adding your name to your spouse's credit card accounts, think again. When you and your spouse have joint credit, both of you will become responsible for 100 percent of the credit card debt. In addition, if one of you has poor credit, it will negatively impact the credit rating of the other.

If you or your spouse does not qualify for a card because of poor credit, and you are willing to give your spouse account privileges anyway, you can make your spouse an authorized user of your credit card. An authorized user is not a joint cardholder and is therefore not liable for any amounts charged to the account. Also, the account activity won't show up on the authorized user's credit record. But remember, you remain responsible for the account.

Insurance

If you and your spouse have separate health insurance coverage, you'll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. For example, if your spouse's health plan has a higher deductible and/or co-payments or fewer benefits than those offered by your plan, he or she may want to join your health plan instead. You'll also want to compare the rate for one family plan against the cost of two single plans.

It's a good idea to examine your auto insurance coverage, too. If you and your spouse own separate cars, you may have different auto insurance carriers. Consider pooling your auto insurance policies with one company; many insurance companies will give you a discount if you insure more than one car with them. If one of you has a poor driving record, however, make sure that changing companies won't mean paying a higher premium.

Employer-sponsored retirement plans

If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan's characteristics. Review each plan together carefully and determine which plan provides the best benefits. If you can afford it, you should each participate to the maximum in your own plan. If your current cash flow is limited, you can make one plan the focus of your retirement strategy.

Choosing The Right Method For You

The most important thing in deciding how to combine finances is to be honest about your feelings from the start and always keep an open line of communication. Money is frequently considered to be the biggest strain on relationships, but working together to find solutions that work for everyone can reduce some of the stress.

If you’re looking for some objective outside perspective to help make some of these tough decisions, please feel free to schedule a free consultation. We also have a great checklist for newlyweds – click here to get your copy.

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.

Are You Maximizing Your Employee Benefits?

For many of you, your salary and bonus are likely just a part of the total compensation you receive from your employer. Why not give yourself a raise by learning about and taking advantage of all your company benefits? This article will help you ensure that you’re making the most of the benefits your employer offers.

Retirement Plans

Your company’s 401(k) plan can play an important role in your future financial security. If your employer matches contributions, you should be contributing at least enough to get the maximum match. If you plan to max out your contributions, make sure you don’t do so too early in the year and potentially miss out on the matching.

For those of you that are considered highly compensated, your employer may also provide a nonqualified deferred compensation plan with matching to cover wages above the qualified limit. It is important to find out how the plans interact and how you can maximize your benefit.

Stock Options and RSUs

Some companies still grant employee stock options as a form of compensation. These can add significant value to your long-term financial success, but they can be complicated and have additional risk that needs to be considered.

 
  • Risk of termination before vesting

  • Risk of market volatility in the stock price

  • Risk of asset concentration

 

There are also several tax considerations that need to be evaluated when working with stock options and RSUs. I recommend working with a financial advisor to determine what works best for you.

Health Insurance

Many companies subsidize health insurance coverage for their employees, and some offer a choice of different plans.

 
  • HMOs generally have lower premiums and lower costs to access health care but limit which providers you can see.

  • PPOs allow you to choose any physician, but they charge higher fees if you decide to see an out-of-network provider.

 

Before selecting a plan, I recommend confirming that your doctor is a preferred provider.

If one of your health insurance choices is a high-deductible health plan, you may have the option to set aside money in a health savings account (HSA) to pay for qualified health care expenses on a pretax basis. HSA contributions remain in your account until you use them, distributions for qualified medical expenses are tax-free, and the account is portable. Some companies even contribute to employees’ HSA accounts.

Flexible Spending Account

Your company may offer flexible spending accounts (FSAs) for a variety of expenses, including health care, dependent care, transportation, and parking. If you have any of these qualified expenses, you may benefit by having pretax money taken out of your paycheck to fund them. For example, if it costs you $100 per month to park at work, you can set aside that amount in an FSA to cover the expense. By contrast, you’d have to earn $157.36 to pay for this expense after taxes, assuming a total tax rate of 36.45 percent.

Life and Disability Insurance

Some employers provide life insurance coverage equal to a multiple of your salary. In many cases you may be able to purchase group supplemental life insurance coverage through payroll deductions. While this can be convenient, the coverage amounts and features may be limited, so I recommend shopping the market to ensure that you’re getting coverage at the best price.

Your employer may also pay for long-term disability insurance. LTD payments from an employer-paid policy are taxable to you; if you pay the premiums, you will receive LTD payments tax-free. If your company gives you the option of paying for your own LTD coverage, you should weigh the cost of covering the premiums yourself versus the benefit of receiving tax-free payments.

Additional Benefits

Some companies offer employee discounts on everything from wireless plans and vision care to movie tickets, hotels, and car rentals. Your employer may also offer reimbursement for certain education expenses.

I see far too often employees missing out on key employer benefits. Working with an adviser and doing a little research could be well worth your while! Contact Us today so we can help you maximize your benefits.

Should You Consolidate Your Retirement Accounts?

If you’re like many of the young professionals I work with every day, myself included, you’ve probably had a few different jobs at this point in your career. In many cases you may have started saving for retirement using the available employer plan or even an individual retirement account (IRA). As you change jobs, it may make sense to consolidate all of your savings into one account to achieve a coordinated investment plan.

Why consolidate?

Consolidating your retirement accounts offers several potential benefits:

 

Less administrative hassle. You’ll receive just one account statement, making it easier to keep track of your funds. Consolidating your accounts also simplifies required minimum distribution calculations and tracking. You’d be surprised how often we discover clients have additional accounts they forgot they even had.

No overlap. If you have multiple accounts, that doesn’t necessarily mean that your investments are properly diversified. In fact, your money may be invested in similar asset classes with significant overlap. Consolidating your retirement accounts gives you a clearer view of your asset allocation picture, as well as any adjustments you may need to make.

Easier rebalancing. Any retirement savings account requires periodic rebalancing to keep it in line with your objectives. By consolidating your accounts, you’re more likely to achieve a cohesive investment strategy.

Proper Beneficiary Management. I can’t tell you how often we see clients with multiple IRAs and 401k plans, all with different beneficiary designations. Even more shocking is how often that information is incorrect or outdated. Consolidation makes it much easier to keep these up to date and accurate.

 

How to consolidate

Moving a retirement account to a new employer plan or to an IRA can be done via direct rollover or trustee-to-trustee transfer.

With a trustee-to-trustee transfer, the funds are sent directly from one plan to another. The plan administrator will make the check payable to your new IRA custodian (never to you directly). That is why this type of transfer is often referred to as a direct rollover. Unlike regular rollovers, there is no tax withholding requirement for this type of transaction. When requesting a transfer from your employer’s plan or another retirement account, be sure to use the right terms to avoid unwanted tax consequences. If you’re unsure, contact your financial planner for assistance.

Should you move your employer plan to an IRA?

A former employer will generally let you keep your money in its retirement plan for as long as you want. You may also choose to move those savings to an IRA. Before making the switch to an IRA, however, it’s wise to consider the following factors:

 

Investment choices. An employer’s 401(k) plan may be lower cost, but your choice of investments will be limited, as 401(k) plan sponsors tend to simplify the investment decision for employees by reducing the number of options. With an IRA, you have a potentially unlimited choice of investments, including individual stocks, mutual funds, and alternative investments rarely offered by employer plans.

Control over distributions. Another benefit of IRAs is that you have more control over when your retirement savings are paid to you. Distribution requirements vary among IRA providers, so be sure to understand the choices available to you and your beneficiaries.

Creditor protection. If creditor protection is a concern, both employer plans and IRAs safeguard your retirement savings from creditors to a certain extent. Employer plans generally offer better protection than IRAs do, however. The level of protection an IRA offers depends on your state laws.

Early withdrawal. One reason to keep funds in an employer account, at least temporarily, is that you may need to tap into your retirement savings before you reach age 59½. There is no tax penalty for taking a distribution from your former employer’s plan after you reach age 55. Although you’ll still pay income taxes, you will avoid the 10-percent penalty for early withdrawal, which would be assessed if you withdrew funds from an IRA before age 59½. Exceptions to the penalty on early IRA distributions include:

 
 
  • Unreimbursed medical expenses that amount to more than 10 percent of your adjusted gross income
  • Disability
  • Distributions from a beneficiary IRA upon the death of the original IRA owner
  • Qualified higher-education expenses
  • Qualified first-time home purchase
  • Distributions under a “substantially equal payment” plan, per Section 72(t) of the Internal Revenue Code
 

A Retirement Strategy That Works For You

As you can see there are some great benefits to consolidating your retirement accounts, however, there are many factors that should be considered. I recommend working with a financial planner to determine what is right for you. Please feel free to reach out to me if you have questions. I'd rather develop the best strategy for you and help you implement it properly, than you potentially creating issues trying to do it yourself.

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.

Ramping Up Your Retirement Savings

No matter where you are in your life, saving for retirement is likely one of your most important financial goals. But, even if you have professional guidance and a clear strategy for your desired future, you could still be missing some straightforward ways to maximize your savings.

The reality is: Most people do not save enough money for retirement. In fact, the National Institute on Retirement Security estimates that Americans have at least a $6.8 trillion gap between the amount they have saved and the amount they need.  Alarmingly, they found the gap could be as high as $14 trillion.

While we are always here to help you address major life events and financial changes, we also wanted to share some simple ways to increase your savings now.

 

Reevaluate Small Budget Items

Changing major aspects of your budget — such as your housing or healthcare costs — can significantly impact your savings potential, but may also take time to implement. To start saving more today, look at the little places where you spend money and see where you can trim your expenses. For example, do you eat lunch out every day or buy a specialty coffee most mornings? Do you have entertainment packages you aren’t really using, such as cable TV or online memberships? Saving a few dollars each day can add up to thousands of dollars over a year, which is money you can put toward your retirement.

Remember to Imagine the Retirement You Desire

Effective retirement strategies often focus on building a clear vision of how you would like to spend life after your career. As you go about your daily life and make financial decisions, how often do you reflect on this vision? Rather than only thinking about your retirement goals during financial reviews or major choices, start incorporating this picture into your regular decision-making process. For example, each time you make a purchase, ask yourself if you’d rather have this item or put the money toward the retirement you desire. You may discover that by grounding each purchase in this way, you spend less on items you don’t really care about — and have more money to put toward the retirement you’ve dreamed about. 

Capture Your Employer’s Full 401(k) Match

U.S. employees lose $24 billion a year by not saving enough in their 401(k) to claim their company’s full matching. If your employer matches your retirement contributions, make sure you contribute at least enough to claim what is essentially free money. And if you are age 50 or older, remember that you can contribute an extra $6,000 each year to your 401(k) on top of the $18,000 annual limit.

Invest Additional Funds

When you receive a raise, bonus, tax refund, inheritance, or other financial windfall, spending the funds can be very tempting. Instead, if you choose to invest this money into your retirement, you can boost your savings without affecting your current bottom line. In addition, if you put a bonus into a 401(k) or IRA, you may also enjoy tax benefits and not owe anything until you withdraw the funds.

 

Saving for retirement is a big responsibility, but it does not have to be a burden. With these simple changes — and support from professionals who care about your future — you can focus on creating a lifestyle that matches your dreams. We are here to help you at each step, so please let us know if you have any questions about these tips or the bigger strategies guiding your retirement.