Quick Tips | Week of February 6th | Advisor Alpha, Stock Options, QDRO, Inheritance
Welcome to this weeks quick tips. Use these ideas to improve your financial situation. Reach out to me to dig deeper into these topics.
Advisor value
Vanguard does a great service for the financial industry. They provide many investment products that help with constructing low cost and diversified portfolio’s for investors worldwide. But they also provide a lot of research to help educate us about the markets. My favorite report they provide is the Advisor’s Alpha report. This report puts a quantifiable value on using a financial advisor. It shows that by using an advisor you could add up to 3% in net returns. This includes any fees the advisor may charge. They break how this extra 3% is earned into services provided the advisor. See the below table to see if your advisor is doing what they can to earn you more returns.
Large Inheritance
Many of my clients anticipate a substantial inheritance so a common question I hear is what to do with it. Everyone’s answer is going to be different because of their current financial circumstances, goals, and their relationship with money. The biggest benefit I provide to clients is helping them make smart choices on what do with it. I think you should enjoy it but at some point it needs to start helping your financial plan. Some places the money could be useful is paying off debt, funding a short term goal, filling your emergency fund bucket, manage your risk with insurance(life or disability), or even invest it. The first step no matter what is to take your time. Don’t spend it before you get it (in case you don’t even get it) and when you do receive it, slow down so you know you made a smart decision.
Qualified Domestic Relations Order
A Qualified Domestic Relations Order (QDRO) is a court order that recognizes a person as having a right to receive all or a portion of the pension, profit-sharing, or other retirement plan benefits of their spouse or former spouse. The QDRO is used in divorce cases to divide these benefits as part of a property settlement agreement. The order must meet specific requirements established by the Employee Retirement Income Security Act (ERISA) in order to be considered "qualified."
Inheriting Non-Cash Assets
In many cases, my clients will inherit non-cash assets such as real estate, business interests, investments, insurance proceeds, or even collectibles and jewelry. Each of these assets come with tax implications that are more complicated than cash. For example, when inheriting a house, the tax basis of the house is valued either on the date of death or 6 months after the date of death. If you live in Pennsylvania you may have to pay state inheritance tax. All of these concerns can be addressed by a qualified estate planning attorney or financial planner.
Stock options – ISO vs NQSO
There are a couple of ways your company can provide stock options. Incentive Stock Options(ISO) and Non-qualified Stock Options(NQSO). The biggest difference between them is the way they are taxed. ISO’s are the most beneficial because the stocks are tax at a capital gains rate when they are sold, not when the options are exercised. NQSO’s are taxed at the beneficiaries ordinary income tax rate when the options are exercised and again when the underlying stock is sold at the investors capital gains rate. The investor will have the greatest benefit if the underlying stock is sold at least one year after exercising the option.
Stock Options – Top Considerations
When exercising stock options consider taxes, diversification, timing, and bargain elements.
Every move you make has a tax consequence. How will you pay for those tax consequences? Can you use the underlying stock to pay taxes? Or, is the stock illiquid? Stay diversified.
Don’t let your exercised options take up more than 15% of your portfolio unless you want to roll the dice.
Time the exercise properly. Will you have more income this year or the following?
Don’t be afraid to exercise the options when the value of the underlying stock has dropped. If you believe in the viability of the company and it’s future growth potential, then you could save yourself on taxes now by exercising sooner.
Fiduciary Mission
At Integritas Financial, we are committed to providing fee-only, fiduciary financial planning services that are tailored to the unique needs of young professionals, particularly millennials. Our experienced planners work with you to develop customized financial plans that address key areas such as estate planning, trusts and wills, retirement, workplace benefits, education funding, student debt, and buying a house.
We believe in transparent, client-focused service that puts your financial goals at the center of everything we do. As a fiduciary firm, we are dedicated to acting in your best interests, and we never sell products that charge commissions to clients.
Our goal is to help you achieve a stable and prosperous financial future by providing comprehensive financial planning services that are tailored to your individual needs. Whether you're just starting out in your career or you're already well-established, we can help you navigate the complexities of financial planning and create a roadmap for success.