Executive Wealth Planning Partners
John spent 28 years as a financial adviser at a major wire house before leaving to start his own advisory firm, Executive Wealth Planning Partners (affiliated with First Financial Equity Corp.) specializes in providing consulting and asset management services to public companies, their employees and qualified retirement plans. Through a series of strategic partnerships John's team offers stock plan administration, corporate cash management, 401(k) plan administration services and individual asset management.
John is also the founder of the National Association of Stock Plan Professionals (NASPP) Rocky Mountain Chapter. He currently serves as Chapter President. This organization is devoted to the promotion of professionalism in the design, administration of and advice to equity compensation plans and their participants at the nation’s publicly traded companies. He is a member of the Global Equity Organization (GEO), the National Center for Employee Ownership (NCEO) and the Financial Planning Association (FPA).
John is an advisory board member and contributing editor at the financial advice web site myStockOptions.com. His popular “Stockbroker Secrets” articles found there are a common-sense guide to managing employee stock options wisely.
John has also assisted in the development of employee stock option analysis software published by Net Worth Strategies in Bend, Oregon which financial and tax advisors nationwide use to model employee stock ownership and stock option exercise strategies.
BA, Economics, University of Colorado-Boulder
Assets Under Management:
Executive Wealth Planning Partners and Work Wealthy are marketing entities that operate under First Financial Equity Corporation for the purposes of providing brokerage securities and investment advisory services. Additionally, advisory services are offered through Vista Private Wealth Partners LLC, a separate SEC registered investment advisory firm. Brokerage Securities and Insurance products are offered through First Financial Equity Corporation. Executive Wealth Planning Partners, First Financial Equity Corporation, Work Wealthy, Vista Private Wealth Partners LLC, and it’s advisors do not give tax or legal advice. This material was not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Please consult your tax advisor or attorney for tax and legal advice. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. First Financial Equity Corporation is Member FINRA/SIPC.
Introduction and Investment Approach - John Barringer
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It's impossible to make a blanket statement covering all brokerage firms because pricing policies change regularly but most charge some sort of nominal annual maintenance fee to cover the cost of sending you required correspondence which includes a quarterly statement and an annual tax report. Other correspondence costs includes forwarding proxy materials and sending annual privacy notices. Many brokerage firms will reduce and some will eliminate the fees if you agree to receive correspondence electronically. Others will waive the fee if your account is "active" which can have a variety of definitions, depending on the firm you choose.
The only way to know for sure is to carefully read the account agreement. Look for terms like "Account Minimums", "Other Fees", "Inactivity Fee" and "Transfer Fee". Schwab, Fidelity, Scotttrade, E*Trade and TD Ameritrade all advertise no-maintenance fee, basic accounts. Commissions at these firms vary from as low as $4.95 to $9.99 per trade.
If it has been less than 60 calander days since the reported dated of your profit sharing distribution, you can roll over the remaining balance to an IRA. You will owe tax on that portion you spent paying off debts and the mortgage. Tax withholding was probably taken from your distribution when your company disbursed your plan balance to you. This withholding is both a tax credit and an amount that will add to the total of your taxable distribution. Here's an example (Assumptions 25% withholding on distribution, 15% taxpayer marginal tax bracket):
Profit Sharing Account Balance: $40,000 - Tax Withholding of $10,000 (25%) = Net Distribution of $30,000
Pay off Debts: $ $20,000
Amount available for rollover to IRA if time elapsed is less than 60 days: $30,000 - 20,000 = $10,000
Taxable Distribution: $10,000 + 20,000 = $30,000
Tax Due in 15% marginal tax bracket: $30,000 X 0.15 = $4,500
If more than 60 days have elapsed since the recorded date of your distribution, you still would be able to make a deductible IRA contribution of $5,500 ($6,500 if you are over 50) to an IRA, if your annual taxable earned income is more than the contribution and below $61,000, for 2016. If you file jointly, your spouse can also make a deductible contribution, if your joint income is more than your joint contributions and below $98,000, for 2016.
I would caution you against making growth projections like those you have made here. 40% is very rapid growth!
But let's say you accept the company's offer to invest $105,000...NUA only applies to company shares purchased in a company-sponsored retirement plan, like a 401(k). If you're contemplating making the purchase with 401(k) assets rolled over from a previous employer, withdrawals at some future date may qualify for NUA. Payroll taxes do not apply to retirement plan distributions. If you just make an outright purchase of shares of the company, any gain you receive at some point in the future (as long as it’s more than one year) will be treated as a long-term capital gain. Under current tax rules, capital gains tax rates are capped at 20% for taxpayers with income below $250,000. There is a 3.8% Net Investment Income tax on gains earned by taxpayers with incomes over $250,000. Nobody knows what the tax laws will be in 15 years.
You are right to be concerned about the eventual resale liquidity in the event the company remains private. You should ask for and be provided with a first right of refusal contract from the company, especially if you're thinking of making this purchase in the retirement plan. If the company eventually goes public, you could receive a windfall and the markets would provide the liquidity to make it possible for you to sell.
At the end of your question, you make reference to stock options. Is that what these are? If so, things are a little more complicated. Are they Non-Qualified (NQ) options or Incentive (ISO) Options? Do they really have a 15 year life? Most NQ employee stock options have a life of 10 years or less. If they are NQ options, the $21/share may be the strike price at which you may buy the shares but you're not obligated to make a purchase right away (You have the "option" to make a purchase) If you have options, it's important to know if the company provides for a "cashless" exercise procedure which would allow you to periodically liquidate the shares associated with the options and receive the difference between your strike price ($21) and whatever the company determines the current valuation is. That profit would be taxed as ordinary income at exercise and would be subject to payroll taxes including Federal, State, FICA and Medicare.
If what you have are Incentive Options, you could exercise them and hold them for long-term tax treatment but be cautious because any gain you realize on the exercise is subject to the Alternative Minimum tax (AMT). Find out if the plan has a vesting period before which, your options would not be exercisable.
As of this answer (April 20, 2016) it's too late to contribute to an IRA for tax year 2015. But here's the rule: If you are covered by and contribute to an employer-sponsored retirement plan, like a 401(k) for any portion of a tax year, you must test your income to determine if IRA contributions can be deducted. For joint filers like you and your spouse, the income limit for a fully deductible IRA contribution, for 2015 was $98,000. It remains the same for 2016.
Using borrowed money to invest in any listed or registered security by means of anything but a margin loan (which uses fully paid for securities as collateral) is a violation of Federal Reserve Board Reg. T. A financial advisor who knowingly allowed or encouraged an investor to leverage his or her investment in this manner would be in violation of the rule and would be putting their securities license and that of their broker/dealer at risk.