Webinar in Review: A Beginners Guide for Those Just Starting Out

Contributed by: Emily Lucido

With a little bit of wit and a whole lot of information, Kali Hassinger, CFP® and Josh Bitel, Client Service Associate, recently presented a webinar that provided young folks with a broad guide for how to start their financial lives off on the right foot. As we found out during the presentation, making smart choices early can make life easier in the long run.

Although Millennials have an average debt of 50% in just student loans, they are doing better than most people might think. About 80% have a budget and 72% are saving for retirement. (Source: http://bit.ly/2bBC3vG). If you are a Millennial and are reading and thinking, “I’m not saving for retirement and I don’t have a budget,” that’s okay! Even by taking small steps now, you can make a huge difference rather than waiting. There are a lot of different factors to think about when tackling financials in the “real world.” The first step is to get organized.

Spending vs. Saving

You can spend smarter by following these tips below:

• Stay Organized - which can include setting up account notifications & alerts

  • These notifications can be set up for when you complete a transaction, or if your balance falls below a specific amount (you can set the minimum balance amount yourself)

  • The notifications can also be good for detecting fraud

• Applications & Technology

  • There are a ton of free apps out there that can help with any situation, just google your need and you can find something suitable for you

• Figuring out your Credit Score

  • Credit Karma gives you free access to your credit score and is highly secure

  • What determines your credit score?
    ~ Check out our blog that breaks down your credit score composition!

  • When building credit and using credit cards, you want to make sure to use only around or below 30% of your available credit

  • Watch for annual fees on credit cards; see if opening the card is worth the annual fee you will end up paying

  • Set up auto pay on all your bills with your credit card to benefit with cash back and rewards

  • To avoid ATM fees, go to the store and buy something small (like a pack of gum) and then get cash back on that purchase

• Student Loans

  • Student loans are something you want to start paying down right away – and if you can make more than just the minimum payment, try to do that

  • Make sure your payments are being allocated toward your highest interest loan

  • A good resource to show you every student loan you have, whether federal or private is, Annualcreditreport.com

Saving is so important, and to start sooner can make such a big difference in the long run. These tip s help with how to smartly save money:

• Cash Savings

  • In case of emergency it’s good to have six months of living expenses in a savings account

• Investing Early

  • The graph below demonstrations how investing your savings early can really benefit you in the long run

  • In the example below Chloe started investing from age 25 and almost reaches $2 million dollars by the age of 65, while we see Noah saves from age 25 (the same amount of money) and just let it sit in cash and only obtained about $653,000 by the age of 65.

• Retirement Savings

  • Although retirement might seem far away, it is important to be forward thinking and plan ahead

  • Employer plans are a great opportunity to save money if your company offers one - always remember to contribute at least the match if you can

• If your employer doesn’t offer a retirement plan you can still invest through a Roth IRA or Traditional IRA. Depending on your situation a Roth or an IRA could work for you.

• Taxes – some quick tips

  • The more money you make, the more you pay in taxes!

  • You can write off student loan interest of up to $2,500 per year

  • TurboTax® is a great online resource for doing your taxes with a 100% accurate calculation guarantee

• Insurance

  • Insurance is something that is so important – but something that can be overlooked when we are young

  • Staying on your parents health coverage until age of 26 is great – but don’t just assume it’s the best option because you aren’t paying anything

  • Remember to get renters insurance when living in an apartment – you never know when you might need it!

The last thing to remember is the 28/36 Rule. Your housing expenses should not exceed 28% of your gross monthly income while your total debt payments should not exceed 36%. Remember, the earlier you start saving the better – and any place you start at is good.

Take 30 minutes to view the webinar below and get the full details of Kali and Josh’s discussion. If you have any questions, please reach out to us -- we’re here to help!

Emily Lucido is a Client Service Associate at Center for Financial Planning, Inc.®

---

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Emily Lucido and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Retirement Planning: Roth 401k vs Traditional 401k

Contributed by: Kali Hassinger, CFP®

With our country’s ever-changing tax policies, we are left to hypothesize what taxation will look like in the coming years. Striking the right balance between taxation now and taxation during retirement is complicated, but a recent study has shown that it may not significantly affect our overall savings behaviors. Since 2006, employers have had the option to offer Roth 401ks to employees, and approximately 49% of employers now include this option as part of their incentive package. 

Roth 401ks effectively remove a large portion of the taxation mystery because all employee contributions are made on an after-tax basis. That means that you pay the tax today at the current and stated rate, but, assuming you wait until 59 ½ and have held the account for five years, all withdrawals are tax-free. All employer matches and contributions, however, are still made on a before-tax basis, so there will still be a tax liability for those future withdrawals.

The Harvard Business School study compared the current and previous savings rates of employees who were given the option to contribute to a Roth 401k and a traditional before-tax 401k. Somewhat surprisingly, there were no significant changes or differences between the before-tax 401k and Roth 401k savings rates. It would be easy to assume that Roth 401ks would have a lower contribution rate because current taxes would eat away at the employee’s ability to save. However, it instead appears that employees continued to use the same savings rates as before-tax 401ks, effectively reducing their current cash flow. Although the participant will pay more tax today, they will have greater purchasing power during retirement. 

The study also touched on the significant participation rate differences between 401k plans that automatically enrolled employees and those that didn’t. With an automatic enrollment plan, unless they choose otherwise, the employee will contribute at least the plan’s default deferral percentage. The lowest participation rate in the studied auto-enroll plans was 90%, while the highest participation rate for a non-enrollment plan (meaning the employees had to manually choose to participate) was 64%.

The study itself didn’t address the question of which type of 401k contribution is more beneficial from a tax or long-term standpoint, but a Roth 401k would inarguably have more purchasing power than a traditional 401k with the same balance. Regardless of what your current retirement plan offers, you can feel confident knowing that both before-tax and Roth 401ks can provide a secure retirement when paired with solid and strategic planning.

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

---

This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Kali Hassinger and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Every investor's situation is unique, you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Prior to making an investment decision, please consult with a financial professional about your individual situation.

Sources: http://www.hbs.edu/faculty/Publication%20Files/front-loading_taxation_b10a2f45-48ff-45ff-9547-99039cf8e9da.pdf

https://www.wsj.com/articles/roth-vs-traditional-401-k-study-finds-a-clear-winner-1497233040?mod=e2fb&mg=prod/accounts-wsj

Preparing for Retirement: How Much Fixed Income Should I Have?

Contributed by: Nick Defenthaler, CFP®

How much guaranteed income (i.e., Social Security, pension and annuity income) should I have in retirement? This is a question I hear quite often from clients who are nearing, or entering, retirement and are seeking our guidance on how to create a tax-efficient and well-diversified retirement paycheck. 

“The 50% Rule”

Although every situation is unique, in most cases, we want to see roughly 50% or more of a retiree’s spending needs satisfied by fixed income. For example, if your goal is to spend $140,000 before-tax (gross) in retirement, ideally, we’d want to see roughly $70,000 or more come from a combination of Social Security, pension, or an annuity income stream. 

Below is an illustration we frequently use with clients to help show where their retirement paycheck will be coming from. The chart also displays the portfolio withdrawal rate to give clients an idea if their desired spending level is realistic or not over the long-term.

Cash Targets

Once we have an idea of what is required to come from your actual portfolio to supplement your spending goal, we’ll typically leave 6 – 12 months (or more depending of course on someone’s risk tolerance) of cash on the “sidelines” to help shield these funds from volatility and ensure money available for your short term cash needs. Believe it or not, since 1980, the average intra-year market decline for the S&P 500 has been 14.1%. Over the course of those 37 years, however, 28 of them have ended the year in positive territory (source:  JP Morgan).  We believe market declines are imminent, and we want to plan ahead to help mitigate their potential impact. By having cash available at all times for your spending needs, it allows you to still receive income from your portfolio while giving it time to “heal” and recover – something that typically occurs within a 12 month time frame. 

As you enter the home stretch of your working career, it’s very important to begin dialing in on what you’re actually spending now compared to what you’d like to spend in retirement. Sometimes the numbers are very close but often times, they are quite different.  As clients approach retirement, we work together to help determine this magic number and provide analysis on whether or not the spending goal is sustainable over the long-term. From there, it’s our job to help re-create a retirement paycheck for you that meets your own unique goals. Don’t hesitate to reach out if we can ever offer a first or second opinion on the best way to create your own retirement paycheck.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

---

Opinions expressed are those of Nick Defenthaler, CFP®, and are not necessarily those of Raymond James. There is no assurance the forecasts provided herein will prove to be correct. This information has been obtained from sources deemed to be reliable but we do not guarantee that it is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note direct investment in any index is not possible. Annuity guarantees are subject to the issuing company's ability to pay for them.

Ford Buyout: Knowing your Options

Contributed by: Nick Defenthaler, CFP®

Over the past month, Ford has extended buyout offers to nearly 15,000 of its salaried employees. The offer, in most cases, contains two main components – a severance package or an enhancement of your retirement benefit from Ford.  Below is a high-level breakdown of some of the key points of the offer:

Special Incentive Program (SIP) and Select Retirement Program (SRP)

• Up to 18 months’ severance

• Retirement benefit enhancement

  • Credit for three additional years of age and three years of service for calculating benefits under the General Retirement Plan (GRP), Benefit Equalization Plan (BEP), and Supplemental Executive Retirement Plan (SERP)

  • This can translate into a nearly 15% increase over your normal benefit

• Must retire no later than September 30, 2017

  • This means up to 27 months of income received in 2017 which more than likely means higher tax brackets for those accepting the offer

• Access to reemployment assistance from Ford for six months

• Health insurance – type of coverage will depend on if you were hired before or after 6/1/2001

• Life insurance – eligible to maintain if you were hired on or after 1/1/2004, are age 55 or older with at least ten years of service, or are age 65 with at least five years of service upon termination

• Vacation

  • Regular – accrued through your last day on pay roll, unused accrued vacation is paid out if the last day on pay roll is prior to year-end

  • Purchased – unused days are forfeited

Buyouts from Ford or any of the “Big Three” are nothing new. As always, however, a thoughtful analysis should be completed when ultimately making a decision on whether to stay employed with Ford or to retire early. Many of the offers extended will be virtually the same, but everyone’s situation is different. If you’ve received an offer from Ford and would like our take on how that offer could impact your own long-term financial game plan, don’t hesitate to reach out to us for guidance. 

P.S. I did a webinar on this topic where I dug deep into the nuances of the offer and discussed some planning opportunities you might consider if you decide to retire early. Check out the replay below!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

Dealing with the Loss of a Spouse

Contributed by: Sandra Adams, CFP®, CeFT™

Whether you have time to prepare for it or it is sudden, the loss of a spouse is one of life’s most traumatic events. For most, it means the loss of one’s soul mate and life partner, one with whom so many past memories and future goals and dreams are woven.  If you have recently lost a spouse or know someone who has, it is an understatement to say that there is an initial feeling of being overwhelmed – there is so much to do at a time when you feel the least capable (and the one with whom you’ve always shared the decision making duties in the past is no longer there to help you). There seem to be lots of people around but you are feeling numb, lost, and alone. 

To make things a little easier to handle at this time, you can break things down into things you really need to do now, things that need to be done soon, and things that can be done later. 

There are very few things that need to be done immediately/now (see my previous blog: Dealing with Death: A Financial Guide). We often encourage clients at this time to do only what is absolutely necessary and leave any bigger decisions for much later when you find yourself in a better place where you can think more clearly and confidently. This space we provide is called the Decision Free Zone – it gives you permission for yourself (and others) to not make any big decisions until you are comfortable moving forward in this time of transition.

Starting soon, it’s important to make sure you are taking care of yourself; eating well, trying to get enough rest, exercising, and trying to stay social. Support groups and counselors can be extremely helpful during this time. You will also need to meet with your professional advisors to make sure needed details and changes are taken care of on financial accounts, legal documents, etc. You will work with your financial planner to determine your income and budget needs for yourself going forward during this transition period, determine how cash will flow, etc. Decisions during this time can take months to years to refine and complete.

Later (and depending on the person this can be a few months or a few years since your spouse’s death), you will be able to look forward and visualize your new life and future. You will be able to work with your advisor to create a Bliss List that will include new goals and a plan for your “new normal.” You will determine: how you want to live your life going forward; what makes you feel joyful and fulfilled; and what is on your bucket list that is left undone? 

The devastation that you feel with a loss of a spouse seems insurmountable. With time, self-care, and the help of your financial planner who can hold your hand through the painful transition, for as long as it takes, you will be able to get through this! If you or someone you know has suffered the loss of a spouse and could use our guidance, please contact us at Sandy.Adams@centerfinplan.com.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

---

Opinions expressed are those of Sandra Adams and are not necessarily those of Raymond James. Raymond James Financial Services and its advisors do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional.

Full Service Network: Coordinating with Multiple Advisors

Contributed by: Josh Bitel

Here at The Center, we believe financial planning requires working as a team. Given the opportunity to work with you, we want you to have a quality relationship with not only you, but also other professionals you’ve hired to work with you to assure that you have the most efficient financial plan tailored specifically for you. This is why we believe that the best long-term relationships typically occur when each team member is working to serve you and your family.

In coordinating with other professionals, The Center can be more efficient and help your plan be as accurate as possible. One example that we run into frequently is the constant open communication with CPAs near tax deadlines; this allows us to make critical decisions and take advantage of opportunities before that mid-April cutoff date sneaks up! This type of communication also helps us to get a better view of your total financial picture. We currently have nine CERTIFIED FINANCIAL PLANNER™ certificate holders here at The Center, each with a wide variety of knowledge in many topics to allow us to leverage other advisors with specific expertise, such as attorneys or insurance agents.  This helps us uncover opportunities to better plan for your future. The availability of these additional resources is another way for us to make sure nothing slips through the cracks!

Another example where this coordination comes in handy is titling of assets. We can leverage estate planning attorneys to make sure assets are in the right hands even when a client may not be around to call the shots! This is especially important when adding beneficiaries to accounts and funding trusts.

Providing referrals to other professionals for clients is an often overlooked part of financial planning that The Center takes pride in offering to clients. Often times when attorneys, CPAs, or other professionals are needed for client cases, and they may not have worked with a professional in the past, this provides us with an opportunity to refer our clients to a professional we already have experience in working with.  In coordination with this, we are able to network with other professionals who have a hand in assisting clients with all aspects of their financial lives.

Coordinating with and leveraging other professionals is one of the many ways we make sure your plan is as personal and detailed as possible, which is what we strive for at The Center.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®

When we’re first starting our careers, we’re always told to at contribute at least the minimum needed to get the full company match in our 401k plans (typically between 4% and 8%, depending on how your plan is structured).  “Never throw away free money!” is a phrase we use quite often with children of clients who are starting their first job out of college. What about, however, those who are well established in their careers, and are fully maximizing 401k contributions ($18,000 for 2017, $24,000 if you’re over the age of 50)? They shouldn’t have to worry about not receiving their full employer match, right? Well, surprisingly, depending on how your 401k plan is structured at work, the answer could actually be yes!  

Let me provide an example to explain what I’m referring to:

Let’s say Heather (age 54) earns a salary of $400,000 and elects to contribute 10% of her salary to her 401k.  Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will actually max out her contributions ($24,000) before the end of August each year.  Let’s also assume that Heather receives a 5% employer match on her 401k – this translates into $20,000/yr. ($400,000 x 5%). If Heather does not have what’s known as a “true up” feature within her plan, her employer would stop making matching contributions on her behalf in August – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather nearly $7,500 in matching dollars for the year!

So how can you ensure that you’re receiving the matching dollars you’re fully entitled to within your 401k? 

The first thing I would recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature.  If it does, you’re in the clear – regardless of when you max out for the year with your contributions, you’ll be receiving the full company match you’re entitled to. 

If your plan does not offer the “true up” feature, and you plan on maximizing your 401k contributions for the year, I’d strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you’re over 50, and you plan on contributing $24,000 to your 401k this year and you’re paid bi-weekly, it might make sense to elect to defer $923.07 every pay period ($923.07 x 26 pay periods = $24,000). By doing so, you’ll ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out before August and potentially loses out on significant employer matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Saying Goodbye to the Joe Louis Arena is just like Entering Retirement

Contributed by: Nick Defenthaler, CFP®

As most of you are probably aware, the iconic Joe Louis Arena held its final Red Wings game several weeks ago on a gorgeous, 72 degree, sunny April day in Detroit. “The Joe,” as most Wings fans called it, has been a staple in the city of Detroit for the past 38 years since it was completed in 1979. As someone who has played hockey all his life, some of my best memories growing up were either spent at The Joe watching games live or catching them on TV where you could feel the electricity from the rink radiating through the television during certain games. The game of hockey has taught me so much – teamwork, comradery, leadership, service, hard work, just to name a few. I firmly believe the lessons the sport has offered me have made me a better person, both personally and professionally. 

As I watched the final game from my living room that bittersweet Sunday evening, I couldn’t help but see the parallels that existed between phasing into retirement and the new chapter the Red Wings and the City of Detroit are entering as the hockey team moves into Little Caesars Arena. Think about it, most of our working careers are going to last about as long as The Joe. The Red Wings who first played at The Joe when it opened in 1979 struggled for many years. But over time, the team and the organization evolved and came together as players found themselves and fine-tuned their skills, both individually and as a team. This is also very similar to what many of our career paths look like. When we first enter the work force out of school, we’re all pretty green. We may think we have it all figured out early on, but it takes years to get to a level of greatness like the Wings did when they won their first Stanley Cup in 1997. 

As the Joe Louis Arena era ends, a new one begins. Looking back over the course of those nearly four decades the Wings spent at The Joe, they were some of best times the Red Wings organization had, just like the time in our lives throughout our working career. Just think about how much probably occurred during this time frame in your own life. Getting married, having children, traveling, being promoted, earning more money, helping children get through college, and welcoming grandchildren to name a few. As one door closes, however, a new one opens and it can be a pretty amazing one, just like the new stage the Red Wings are stepping into. 

Although The Joe was not a glamourous building, it had so much grit and character. It embodied the hard working attitude our state and area have and I feel very lucky to be able to have experienced so many good times there. I must say, however, I’m anxiously looking forward to attending many games at the new rink. I can only hope Little Caesars Arena will produce as much fun and great memories as The Joe did! For those of you soon entering that new phase in your life, the phase of retirement, this can also be an exciting time. As you gear up for this transition, please reach out to us in order to make this time as smooth and memorable as possible.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

---

Opinions expressed are those of Nick Defenthaler and are not necessarily those of Raymond James. This information has been obtained from sources deemed to be reliable but we cannot guarantee that is accurate or complete.

Saving for Education for a Future Grandchild: Roth IRA vs. 529 Plan

Contributed by: Matthew E. Chope, CFP®

Congrats – you have a new grand-baby on the way! During all the excitement, the reality of the future may set in: future education expenses. “Where is one of the best places to save for our unborn grand-baby?” This very question was asked by a couple in their mid-50s a few weeks back. They have modest income, earn about $100,000 a year, and are currently funding retirement based plans at work. Furthermore, they take advantage of the full match by their employers and benefit from a deduction at the 25% bracket. The folks that asked the question will most likely not be in the 25% bracket during their non-working years of retirement. So, they likely are correctly benefiting from the personal tax arbitrage within their income brackets now vs the expected future. These folks are working towards being on track for retirement by 68 which is a little longer than most trying to achieve such a goal. But they are doing OK with that timeframe and are working as long as they need to. They also have some limited discretionary income remaining ($200-$300 a month) to save for this new goal of potential education for future grandchildren.

Why a Roth IRA might be better than a 529 Plan in this situation:

• In this case, while both vehicles provide tax-free growth, the Roth IRA can help provide added flexibility.

• There is no impact on the FAFSA (Free Application for Federal Student Aid) calculation with the Roth IRA (there is generally no impact with a 529 if a grandparent is the owner of the account, but if the owner is changed to a parent, that could have a negative impact just about the time you don’t want it to!).

• There is generally more investment flexibility with the Roth. There are more investment options offered and 529s are limited on the number of trades allowed on an annual basis.

• Probably one of the largest benefits for the Roth IRA is that you don’t have any tax or tax penalties if the grandchild decides not to go to school, or if the money is needed for an emergency or for your retirement safety net instead.

College saving is never one size fits all. Please contact us with assistance in helping to determine the most suitable college savings strategy to help implement for your family. We are always happy to help!

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

---

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mathew Chope and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investments mentioned may not be suitable for all investors. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Webinar in Review: Stock Option Optimization

Contributed by: Emily Lucido

If you have non-qualified stock options, restricted stock units, or incentive stock options but don't fully understand them, you're not alone. What exactly are stock options? Why do employers offer them? How do they factor into your overall financial game plan? In a recent webinar hosted by Nick Defenthaler, CFP®, he answers all these questions in a simplified manner and discusses what it could mean to be offered a stock option from your employer and how to go about maximizing them.

Employee stock options can be an incredible add-on to employee compensation. Typically, those that are eligible are people within a higher level executive position at their workplace, or are with a startup firm. In most cases, employers use stock options as a way to attract, retain, and motivate employees which can then potentially drive up the company stock price.

What is vesting?

One very important part of stock options is the vesting schedule. Every company has a different structure for vesting. The vesting schedule can depend upon a variety of things including the company you work for, as well as, your position at the company. The chart below represents a three year vesting schedule:

In the above example, each year, you receive 33% more of the stock options, ultimately leading you to year three where you end up with 100%, having access to all options (which is where the incentive to stay with your employer comes in). So, if you were to leave the company in year two, you would only end up with 67% of options vested.

What are the most popular forms and how do they function?

• Non-Qualified Stock Options (NSO)

  • A written offer from an employer to sell stock to an employee at a specific price within a specific time period

  • With NSO’s the market price has to be greater than the exercise price for the option to have value

    • Can be seen as a more risky form of equity compensation

  • Tax implications: when you are granted or “given” stock options, there is no tax

    • If you exercise those options there could be a taxable event if there is a gain

    • The gain is taxed as ordinary income, as a form of “compensation”

• Restricted Stock Unit (RSU)

  • Similar to NSO’s, RSUs are a written offer from an employer to sell stock to an employee at a specific price within a specific time period

  • Main difference: As long as the company stock has value there will be value in your stock option. It is not determined by the market price as NSO’s are

    • Can be seen as more conservative form of equity compensation

  • Tax implications: Same as NSO’s - when you are granted or “given” stock options, there is no tax liability

    • Tax is due upon vesting

    • Also taxed as ordinary income, as a form of “compensation”

    • In most cases, we recommend selling the shares of RSU once they vest, in order to reduce risk and to diversify

An important note when thinking of stock options and whether to exercise or not:

“Don’t let the tax tail wag the investment dog.”

• Simply put, don’t let taxes be your only reason for deciding whether to exercise or not

• If you choose not to exercise because you are worried about the tax implications, the stock could easily go down in price, losing the potential gain you could have made

Overall, stock options have many benefits to them and can be extremely valuable when used effectively. There are many more opportunities you can take advantage of, so take a moment to listen to the webinar below as Nick goes into more detail on what you can do to effectively manage your portfolio when considering your stock options.

Emily Lucido is a Client Service Associate at Center for Financial Planning, Inc.®

---

This information does not purport to be a complete description of employer stock options or employer stock option planning strategies, and should not be construed as a recommendation. This information has been obtained from sources considered to be reliable but we do not guarantee that it is accurate or complete. Opinions expressed are those of Emily Lucido and are not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.