Looking back, you know exactly how you’ve gotten to where you are today. Your hard work, industry expertise, and strong leadership skills led you to an executive position that comes with greater rewards that substantially elevate your standard of living.
Gone are the days of simply receiving a high salary, standard retirement savings, and good medical benefits. Just like your job, the compensation package you’re offered is more complicated and takes an advanced level of financial knowledge to manage.
As your wealth grows, minimizing tax liabilities becomes increasingly important. At Rothschild Wealth Partners, we sometimes see executives who learned too late that they could have saved taxes or done more with their earnings to secure their future goals. Planning well in advance is the key to making the most out of your generous deferred compensation opportunities.
If you’re a well-compensated business leader, whether you’ve been doing this for years or are reviewing your first executive compensation package, here are six things to do that can maximize your work income.
Understand your equity compensation
As a performance incentive, executive packages often come with shares of the company. There are different types of equity, and each has its own rules on how to execute them and how they are taxed. Incentive stock options (ISO), non-qualified stock options (NSO), restricted stock awards (RSA), restricted stock units (RSU), employee stock ownership plans (ESOP), and qualified small-business stock (QSBS) all sound similar, but you need to understand their different strike prices, option periods, and vesting schedules to buy and sell them at the right time. If you’re in the C-suite, you may also need to file a 10b5-1 Plan before you sell your shares. Not any CPA will do. You need a tax accountant who thoroughly understands equity compensation.
Use the right retirement plans
You already know to set aside as much as possible to your company’s tax-advantaged 401(k) plans and get the company’s full match. But now, you want to invest more for your retirement and maximize tax savings. Should you invest in a pre-tax traditional 401(k) or an after-tax Roth? Can you do a backdoor Roth conversion? Does your company have a defined benefit plan? You may also be offered a choice of nonqualified retirement plans that allow you to set aside more income than standard IRS limits, but also come with more risks. A financial advisor who specializes in corporate retirement plans would be a great help.
Save for your future health
Another way to defer income and save taxes is to use a health savings account (HSA). These accounts allow you to set aside pre-tax income and invest it. As long as you use the money for qualifying health expenses, the income is tax free. And if you don’t need all the money today, the funds continue to grow even after you leave the company or switch health plans later.
In order to save, these accounts are paired with a lower-cost, high-deductible health plan. So, it’s important to review your family’s current healthcare needs and decide which plan makes the most sense for you.
Diversify your portfolio
When your main salary and your stock options and your other deferred income all come from the same company, you very likely have concentrated wealth, and that’s a risk. It’s best to allocate your investments into other assets that are less correlated to the company and industry you work in. Also establish a stock disposition plan that allows you to sell your shares moderately, take advantage of tax-loss harvesting, and re-invest in other growth opportunities. Consult an investment manager to explore specialized investment strategies.
Review insurance options
Should you purchase life insurance, extra disability insurance, and accident insurance through the company? Do you need errors & omissions and more liability coverage given your role? Work with an insurance specialist to take a holistic look at your risks and current coverages to see if company insurance plans will benefit you or whether you should consider a customized insurance solution.
Update your estate plan
As your wealth grows and your compensation gets more complicated, so do other areas of your financial picture. Comprehensive estate and philanthropic planning can help you minimize taxes and realize your future goals for your family and community. For example, gifting stock, setting up donor advised funds, and establishing trusts or foundations are all advantageous ways to make your income today benefit those you care about tomorrow.
Along with greater wealth, executive compensation packages bring a higher level of complexity to your financial situation. Rothschild Wealth Partners not only works with corporate executives and small business owners with their individual wealth planning, we also advise businesses on corporate retirement benefits. So, we know the ins and outs of executive compensation. Our team can review your compensation package and recommend a wealth management plan that keeps you on the path of success.
