When cooking up your favorite Italian dish, the most common ingredient is pasta, and there are 350 different types. But what about your retirement recipe? The most important ingredient is the retirement plan itself, with 14 different types. So what are the best ingredients for your Recipe for Retirement? In this episode, Joe Anderson, CFP® and Big Al Clopine, CPA outline the characteristics, benefits, and drawbacks of defined contribution plans, defined benefit plans, and equity compensation for workers, small business owners, management and executives.
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Important Points:
- 00:00 – Intro
- 01:01 – Percentage of Public Companies That Provide Defined Contribution Plans, Defined Benefit Plans, and Equity Compensation
- 01:40 – Retirement Plans for Workers, Self-Employed Small Business Owners, Management & Executives
- 01:59 – 401(k), 403(b), 457: Defined Contribution Plans Explained
- 02:48 – Defined Contribution Plan Characteristics
- 03:38 – Traditional, Roth, and Spousal IRAs: Individual Retirement Arrangements Explained
- 04:13 – IRA Characteristics
- 05:01 – Pensions, Cash Balance, Hybrid: Defined Benefit Plans Explained
- 05:44 – Defined Benefit Plan Characteristics
- 06:45 – Calculate Your Free Financial Blueprint
- 07:31 – True/False: Business owners can legally “double-dip” and make contributions as an employee and an employer to a Solo 401(k) plan
- 07:57 – Self-Employed Small Business Retirement Plans Explained
- 08:58 – Solo 401(k), SEP IRA, SIMPLE IRA Characteristics
- 11:15 – Calculate Your Free Financial Blueprint
- 12:15 – Almost half of S&P 500 companies offer Employee Stock Purchase Plans to their employees
- 12:50 – Management/Executive Retirement Plans Explained
- 13:04 – RSU, NSO & ISO, ESPP Characteristics
- 16:57 – I’m considering taking a job that offers a lower starting salary but offsets it with an ESPP. Is that a good deal? – Jill, San Diego
- 18:15 – I have an S-corp and all my earnings are used for expenses so I have no wages. Can I still contribute to a plan? – Kyle, Seattle
- 18:35 – Calculate Your Free Financial Blueprint
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Transcript:
Joe: Who’s hungry for retirement? Well, today we have the right recipe for you.
Welcome to the show, everyone. The show is called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors, and we have the chef today, Chef CPA Big Al.
Al: Hey, I’m ready to cook a little bit.
Joe: Are you ready to cook up some retirement? Well, we have the recipe for you. Speaking of recipes, Italian food is my favorite. But when you’re going to cook an Italian meal, what is the most important ingredient? What do you think, Big Al?
Al: Gotta be pasta.
Joe: It’s gotta be pasta. Pastaria! There we go. There’s 350 different types of pasta that you can make your meal with. When you’re thinking about making your overall retirement, there’s 14 different plans. What do they have in common?
Al: Gotta be savings.
Joe: Savings! That’s today’s financial focus.
All right, let’s break some stuff down here. 67% of private industry workers have access to a defined contribution plan. So if you work for a very large company, in most cases, still it’s not 100%, 67% of those individuals have a retirement account. Private industry workers have access to a defined benefit. It’s only 15%. That defined benefit plan is that standard pension plan. 43% of public companies offer equity compensation. So if you’re fortunate enough to work for these types of companies, you have different options. And we want to break all those down for you. So let’s bring in the Big man.
Al: Today we’re going to talk about all kinds of different retirement plans. Some apply to employees or workers, working class. Others apply to small business owners and some are executives or management. And Joe, I think this is the topic today applies to most of the workers out there.
Joe: Yeah. Let’s start with the most common plans that most people have heard of or probably own or have. The standard 401(k). Then you have the 403(b) or the 457. These are defined contribution plans. What a defined contribution plan means is that the contribution is defined for you by the IRS. Is that you can only put so many dollars into these plans. So you can either do a pre-tax or now after-tax in a Roth component. But then they grow tax-deferred. And they’re built for a vehicle, for you to use in retirement.
Al: Yeah, and I think the important thing to know about these is generally you’re making contributions from your salary. Your employer is likely matching to some level, but you’re making the contributions yourself. And Joe, why don’t we get into the, the limits there?
Joe: Yeah. 2024. $23,000. Or you’re over 50. It’s $30,500. Average 401(k) employer match is right around that 4% to 6% range. So if you have a 401(k) and they are matching, what we see is that a lot of you don’t take advantage of the full match. So make sure that you understand what that employer is matching to you, or for you, and making sure that you’re getting that match. Most plans offer at least a couple of options. Right? So understand what options that you have and make sure that you have a diversified portfolio based on your goals. And then eligible employees, such as school teachers or maybe people that work in a hospital can have access to both the 403 (b) and the 457. Both of these have the same contribution limits. So then you can sock away quite a bit of money here.
Al: Yeah. And if you qualify for both, Joe, it really is a great thing to be able to double up on that. So let’s get into Roth IRAs, regular IRAs. So traditional, that’s the regular IRA. That’s generally a pre-tax contribution, it grows tax-deferred. And then you pay the tax when you pull the money out in retirement. A Roth is kind of just the opposite. There’s no tax deduction going in. It grows tax-free. But when you take the money out, it’s 100% tax-free. Then you can also do a spousal IRA that allows you to, for your spouse, even though they’re not working, to have an IRA based upon your earned income.
Joe: Yeah, contribution limits for IRA is $7000, $8000 if you’re over 50. This is both the standard IRA and the Roth IRA. Eligibility, you have to have $146,000 if you’re single for your Modified Adjusted Gross Income for a full contribution to the Roth IRA. Full eligibility for married people is $230,000. Now remember, if you want to put money into a standard IRA and your income is over these limits, you’re still able to put money into a standard IRA. However, you won’t be able to take the tax deduction, but it’s an after-tax contribution that would sit in that IRA. Some people then would convert that to a Roth IRA, that’s called the backdoor. Minors can also have an IRA, as long as they have earned income.
Al: Okay, we’ll talk about defined benefit plans. These are kind of some of the older plans that used to be more prevalent. They’re still around, though, for a lot of companies, particularly larger companies. So there’s 3 basic kinds. One that would be kind of the typical defined benefit plan or pension plan. That’s where you’re getting a guaranteed monthly payment based upon a certain benefit. Then there’s cash balance plans where you’re still getting some kind of pension benefit, but instead of it growing to a certain level to guarantee a benefit, what they’re trying to do is get to a certain cash level or investment level to where you can create income in retirement after that. And then you can have hybrid plans that are kind of a combination of both, Joe.
Joe: Yeah. Yes. And just the, the major difference here between that 401(k) plan or IRAs, those are defined contribution plans. You can only put so many dollars in. You have to be eligible and you have to qualify. The defined benefit plan is just the opposite. They’re trying to define the benefit. And so you can fund these plans with a lot more money because at the end when you hit retirement, we want these dollars to be big enough to a) maybe pay you a certain dollar figure for the rest of your life or have this cash balance amount at the day of retirement or there could be some hybrid plans as well. Just know, most defined benefit plans, they’re funded with pre-tax dollars. So either the employer’s doing it and getting that tax deduction or if it’s a hybrid plan. So all of those dollars that come out to you as an income stream, they’re gonna be taxed at ordinary income.
Al: Yeah, and you got to be aware of that and if you if you’re a part of a defined benefit plan and IRA or 401(k) you end up with a lot of money in these accounts or a lot of income from them, then just be aware you may have a tax problem later on.
Joe: Hey, we’re talking about recipes for retirement. How about a Blueprint for Your Retirement? Go to YourMoneyYourWealth.com. It’s our special offer. It’s brand new folks. Go to YourMoneyYourWealth.com. Click on that Financial Blueprint. You put your data in there and you will get a full blueprint for free of your overall retirement. It’s a useful guide, make sure you take advantage of it. YourMoneyYourWealth.com. Click on that special offer. Got to take a break. We got more cookin’ to do. We got your Recipe for Retirement right here. We’ll be right back.
Joe: Welcome back folks. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al. We’re cooking up some retirement today. It’s a Recipe for Retirement. Let’s see how you did on that true/false question.
Al: Business owners can legally double dip and make contributions as an employee and employer to a solo 401(k) plan. Well, that is a true statement. If you have a solo 401(k), meaning you have your own 401(k), you’ve got a business and there’s no employees except yourself, you can actually do contributions, your regular ones as an employee, and the employer as well.
Joe: Yeah. This is a great transition for you individuals that are self-employed. You have a little bit of a double banger here, right? You can make your deferrals as an employee, but you’re also the employer. So then you can make those elections too. Al, let’s walk down small business lane here and look at the different plans for an individual sole proprietor or maybe someone that has a small business.
Al: Yeah, there’s really 3 main ones, Joe. So we started talking about the solo 401(k), so it is like a regular 401(k), same limits, but it’s when you only- when you have no employees, it’s just yourself or yourself, and your spouse still counts as a single employee. So that’s a traditional 401(k). It’s very good as we talked about, because you can do the employee and the employer. The SEP IRA is a even simpler plan. It’s the same contribution limits as a solo, except you can’t do the employee part. And then a simple plan is nice as well. Just the amounts you can put in there, Joe, are a little bit less.
Joe: Yeah. Real quickly, we’ll break it down. Solo 401(k), $23,000. $3500 just like the standard 401(k) if you were an employee of a larger firm. But I am the employee and the employer so I can put another 25% of compensation up to a max of $76,500 if I’m over 50 or $69,000. Think about that. Almost $70,000 or over $70,000 that you could put into a solo 401(k) plan. So if you are sole proprietor and you want to save money in tax, this is one of the best ways to do it. A solo 401(k). Also, you can go traditional or you can go Roth. How about that? Put $70,000 in the solo 401(k). All Roth, 100% tax-free. A really cool vehicle for you self-employed individuals. Breaking down the set. This is kinda the old Jurassic Park. Here’s- yeah, this is what you used to recommend back in the day.
Al: Yeah, that’s kinda all they had. So let’s get into that, because it’s still available. So earnings, same thing, 25% of earnings, same up to $69,000. Contributions can be made only by employers. So there’s no employee part. One of the nice things about a SEP is you can do it after the fact. You can set up the plan in the following year, all the way to the due date of your return with extension. So that’s partly why they’re popular. But you can make that contribution in the following year, too. And now, starting actually in 2023 and in future years, you can do your SEPP contribution as a Roth.
Joe: Simple plans. This is if you have employees. So with the SEPP plan, you have to make an employee contribution. So if you have a bunch of employees, maybe the SEPP is not all that great. It’s really cheap to set up, but this is might be a little bit better plan. Simple IRA ,super simple here, like $16,000 or $19,500 if you’re over 50, a little bit cheaper to set up, but you have to have employee match. So the employer matches up to 3% of the participant’s. Tax withdrawals on retirement. Early withdrawal occurred could be 10% to 25%. So some people will set these up small, small business owners. And then they cash them out the next year, trying to get that tax deduction. IRS doesn’t really care for that. Those are the plans. If you’re self-employed, you have a lot of options. If you need help with this, go to YourMoneyYourWealth wealth.com. Click on our Financial Blueprint. You put your data in there and you will get a full blueprint for free of your overall retirement. It’s a great, useful guide. Make sure you take advantage of it. That’s our gift to you. A lot of really cool things. A lot of good information. Get financially prepared. We got to take a break. Show’s called Your Money, Your Wealth®.
Hey, welcome back folks. Show’s called Your Money, Your Wealth®. Joe Anderson and Big Al we’re hanging out. We’re answering your money questions in a little bit. But before we’re doing that, we’re getting your recipe for retirement dialed in. Go to YourMoneyYourWealth.com. We got a free gift for you today. Go to our special offer. It’s our Financial Blueprint. Do you have a blueprint for retirement? Well, this is your opportunity to do so. Ask you a few questions about your overall situation. Hit the button. Boom. Here comes a blueprint for you. Let’s see how you did on that true/false question.
Al: Almost half of S&P 500 companies offer employee stock purchase plans to their employees. Joe, I think that’s a true statement, but what are the numbers?
Joe: 49%, Big Al.
Al: Okay. That’s pretty, that’s about 50%.
Joe: How many people out there actually know what a Russell 3000 company is?
Al: I bet you the 3000 companies that do and the employees of those.
Joe: 38%. So if you work for larger companies, publicly traded companies, right? A lot of those have kind of unique plans, especially as you go up the ladder into management in, executive level, RSUs, NSOs, ISOs, what is that? Non-Qualified Stock Options. Incentive Stock options. And you got the ESPP. We’re gonna bring in the CPA to kind of break all this stuff down. Big Al, let’s start with RSUs.
Al: Okay, RSU, Restricted Stock Unit. So this is when a company grants access to a certain amount of shares. They vest over time. Instead of you buying the shares, you get the shares, but you have to work a certain amount of time to get them. Generally, when they vest, they are taxable for whatever the current value is. And the value, if it’s a public company, you know exactly what the value is. If it’s a private company, well, then usually the board of directors figure out maybe once a quarter or however often they do it, they figure out the value. And you are taxed as ordinary income. Whatever the value is, Joe, that gets added right to your W2.
Joe: And so, yeah, you have to pay tax on the value, but then you have the stock. It’s compensation is basically what it is. Instead of paying you cash, they’re paying you with stock. And if it’s a really fast-growing, great company, you know, we’ve seen people, we’ve seen a lot of people grow a lot of wealth with these types of arrangements.
Al: Yeah, no question. So the second one would be a stock option. There’s non-qualifying stock options and incentive stock options. So you have a right to buy stock at a certain price in the future, regardless of what the stock price. Maybe you have the right to buy the stock at $10 a share and it will vest just like a restricted stock unit, but at the vesting date, you’re allowed to buy shares at that specified price. If it’s worth more than that, then what happens is that additional amount gets added to your compensation on your W2. But you actually have to pay the company for that, the shares that you actually bought. Joe, it’s still a great way to go, but now you’re actually buying shares, so you’re coughing up money and paying tax on it.
Joe: Yeah, non-qualified or instead of stock options, it’s still a phenomenal plan. So for those, it gets a little bit complicated depending on the tranches and how many that you get and what’s going on with the overall stock price.
What is the vesting schedule? But if you look at all right, I’m still participating in the growth of the company. I am an owner of that company. When I received these stocks, if it’s an option, or if it’s the restricted share. The RSU is a little bit better because you have the share of your taxes compensation when it comes to an option, I have the option to purchase that at a particular price. Sometimes that price is very favorable. Sometimes it’s not really depending on how volatile that stock is. But if you have these types of plans, you know, you want to make sure that you dive in a little bit deeper just so you understand the pros and cons and see that how that will encompass in your overall wealth plan. Finally, ESPP.
Al: ESPP. Employee Stock Purchase Plans. These are generally larger companies, public companies that offer these. And what happens is, is employees are allowed to buy a certain amount of shares at a discount, usually a 15% discount. There’s a period of time that they can do that, quarterly, twice a year, whatever it might be for that company. And the stock is worth at the point where you want to buy it, generally, there’s a 15% discount and you can generally go back to the beginning of that period and if the stock price is lower, you actually get that price. And the taxation, generally, that discount amount you will pay ordinary income on that. But Joe, again, a great way to have equity in a company.
Joe: You want to make sure that you understand all of the options that you have within the employer that you’re working for. You know, if you have employee stock options, if you have restricted shares coming to you. You also have the opportunity to participate in ESPP. Now, those are 3 really awesome benefits. But you want to make sure that you’re balanced in your overall approach. Because you’re also getting your paycheck from that company. So you don’t want to put all of your eggs in one basket. You want to be diversified in your overall strategy. Not only from an investment perspective, but also your plan perspective. So, alright, let’s switch gears a little bit. Let’s see what questions you have for Big Al and I today.
Al: So this is from Jill in San Diego. “I’m considering taking a job that offers a starting lower salary, but offsets it with an ESPP. Is that a good deal?” Jill, I would say this. The more important thing is, is this the right job for you? Let’s not worry about the compensation or the ESPP. Is this the right company? Are there opportunities for you to grow? But I will say, to get specific to your question, if you have a, if you have two identical companies, two identical jobs, two identical opportunities, one, the one that has the ESPP plan, might be a better way to go as long as you feel really good about the prospects of the company.
Joe: If you look at people that have a 401(k) plan, just a simple 401(k) plan, versus other employees or other individuals that don’t have a 401(k) plan, who do you think has more wealth or more savings by the time they hit retirement? It’s the people that have plans available to them, especially through their employers. So making sure that you understand your benefits, and that’s a really good benefit. So yeah, you might want to lean towards there, depending on how big of a discount of a paycheck that you’re going to get, probably need that information too. Let’s go to the next question.
Al: This is from Kyle in Seattle. “I have an S Corp and all of my earnings are used for expenses so I can, I have no wages. Can I still contribute to a plan?” Kyle, no. Unfortunately, you can’t. You gotta have wages to be able to contribute to any of these plans.”
Joe: Alright. That’s it for us folks. Go to the website, click on that special offer. It’s our Financial Blueprint. It’s brand new. You’re gonna love it. All right. You know it’s gonna take you about 5 minutes to fill out. It’s gonna give you the blueprint that you need to make sure that you can make it to retirement, have the retirement that you want. YourMoneyYourWealth.com. Click on the Financial Blueprint, start doing this stuff on your own. Get a good start. And that’s our gift to you. That’s it for us. Hopefully you liked Recipe for Retirement. For Big Al Clopine, I’m Joe Anderson. We will see you next time, folks.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
