Investing
Zoe Team
6 min read
Employee benefits are complex assets that require intentional review to maximize their value for long-term wealth growth.
Regularly assessing your compensation package allows you to pivot your strategy as your life circumstances and financial goals evolve.
Professional guidance helps ensure you aren’t leaving value on the table or mismanaging the tax implications of your benefits.
Benefits evolve and your personal needs change; reviewing them ensures your compensation package remains aligned with your long-term financial plan.
Maximizing benefits like retirement contributions and stock incentives can significantly accelerate wealth accumulation and tax efficiency.
Annual reviews or during major life events are ideal times to optimize your selection and ensure you are capturing all available incentives.
Becoming an expert in a new topic takes ample time and effort. With proper financial guidance and an understanding of your employee benefits, you will become a master in no time… if you are willing to rethink, relearn, and dive deep into the types of equity compensation you’ve been offered.
Becoming an expert in a new topic takes ample time and effort. When getting into the weeds of your equity compensation, you’ll likely feel you need to read and ask and then read and ask some more. However, with proper financial guidance and an understanding of your employee benefits, you will become a master in no time… if you are willing to rethink, relearn, and dive deep into the types of equity compensation you’ve been offered.
RSUs, NSOs, ISOs, or ESPP – you might have one or all of these equity compensation choices at your company. A complex compensation structure means that there are tax-saving strategies to consider, cash-flow needs to plan for, and opportunities to better leverage employee benefits. Do you know what benefits you should prioritize?
Here are five questions to consider:
Now you’re probably asking, “I thought this article was about equity compensation. Why are you talking about my 401(k)?!”
The *free* money you receive from your employer is one of the best returns on your savings. For example, if you work for Meta/Facebook, Meta will match $1 for $1 of your 401(k) contribution up to 50% of the IRS Federal limit. So if you contribute $5,000 to your 401(k), Meta will match the total $5,000. A 100% rate of return on your contribution should be the first benefit to maximize your employer benefits.
Tax-advantaged accounts include your 401(k), Health Savings Account (HSA), and Flexible Spending Account (FSA). Once again, tax-advantaged accounts are hard to beat when we think about maximizing employer benefits.
For your 401(k), this would mean fully funding the pre-tax/Roth amount. The 2023 401(k) limit is $22,500 if you’re under 50 and $30,000 if you turn 50 this year or are 50 and older.
Does your 401(k) plan include the Mega Backdoor Roth provision? We see a lot of employer plans, especially in the tech industry, have this benefit. Companies such as Microsoft, Amazon, Meta, or Nike give you access to the Mega Backdoor Roth.
Many people do not realize there is a federal limit on how much you can contribute. 2023 limits: $66,000 if you’re under 50 and $73,500 if you’re 50 or older). This benefit is often overlooked and might be one of the smarter ways to save for retirement (in my opinion).
Participating in your HSA is an efficient way to save, invest, and reduce taxes. The HSA comes with three significant tax benefits:
Contributions to your HSA are tax deductible.
Your money grows within the account tax-deferred.
You can withdraw money from your account tax-free if the funds are used for qualified medical expenses.
Common forms of equity compensation include Restricted Stock Units (RSUs), Options (ISOs and NSOs), and Employee Stock Purchase Plans (ESPP). RSUs are an equity compensation method to receive shares of company stock subject to a vesting period. Options are a right to buy the stock at a given price in the future. Options can be either tax-advantaged Incentive Stock Options (ISOs) or Nonstatutory Options (NSOs). ESPP allows you to buy up to $25,000 of company stock at a discount of up to 15%.
Typically, many employees let their stock grants accumulate in their investment accounts and cover expenses using their salary. I encourage you to flip this mindset. Instead, you can sell your RSUs when they vest and use the proceeds to fund your monthly expenses. This strategy can free up more of your salary for the tax-advantaged accounts listed above.
RSUs are simpler to manage since you can’t control when the shares vest. You recognize ordinary income for tax purposes at the time the RSUs vest. Also, RSUs do not require the stock price to increase to have value.
Options are more complicated to manage and riskier than RSUs. You control when you exercise the options and, thus, when you will be taxed. In addition, the stock price must increase after the grant date for the options to have value. There are several factors to think through when you decide to exercise options.
Though ESPP allows you to buy the stock at a discount, there is potential to build a large concentration in your employer stock with limited tax benefits. With that said, there are some benefits of setting aside a portion of your income to purchase shares of your company stock at a discount. For example, if you purchase shares at a discount and sell the same shares immediately, you may realize an immediate ROI. You will want to think through the tax implications of this strategy. ESPPs vary significantly across companies, and it’s best to discuss this decision with an advisor.
Your marginal and effective tax rates are crucial to understanding how to maximize your benefits. The first thing to consider are your 401(k) contributions. If you have a high marginal tax rate, pre-tax 401(k) and HSA contributions will reduce your current tax bill. If you’re in a low marginal tax rate, Roth 401(k) contributions will have years to grow tax-free.
Next, we must understand your effective tax rate to apply to your RSU and NSO option income. Your default federal tax withholding on RSUs will be 22% for supplemental income of $1 million or less. However, your effective tax rate may be much higher than 22%, causing a large tax bill due. Several companies (like Microsoft, Amazon, and Meta) allow you to increase your federal tax withholding to align with your effective tax rate and reduce that tax surprise.
Taxes are overwhelming – none of us can avoid paying them, but by taking a proactive approach towards your tax planning, you can help ease some of your anxiety. In addition, integrating a tax planning strategy into your savings plan may allow you to reduce your tax bill.
You deserve to make the most of what you earn throughout your career. As your career evolves, your compensation gets more complex. Your income accelerates, and stock awards compound. Your benefits can help you realize financial security when leveraged correctly. With a thorough understanding of your compensation, employer benefits, and other sources of income, you will be better prepared to meet your financial needs and your family’s needs.
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