For virtually all investors, 2022 has been a challenging and frustrating year. Persistently high inflation has resulted in an environment of quickly rising interest rates, leading to a “double-whammy” of twin selloffs across both stocks and bonds. After increasing more than 31% in 2019, 18% in 2020, and 28% last year, the S&P 500, an often-cited proxy for the stock market, has declined more than 20% year-to-date in 2022 (as of 9.23.2022). And to make matters worse, the bond market, as measured by the Bloomberg U.S. Aggregate Bond Index, has suffered through declines not experienced in more than 50 years. Put differently, investing in conventional stock and bond asset classes has not worked very well so far in 2022.
Not surprisingly, these declines have led to an increase in demand for “supplemental” investment opportunities outside of these traditional areas, and have led more and more people to inquire about alternative investments.
Put simply, an alternative investment is any financial asset that does not classify as a traditional stock, bond, or cash. While they can vary widely in their accessibility and structure, alternatives can provide an opportunity to 1.) boost returns, 2.) generate income, 3.) provide potential tax benefits, and 4.) reduce risk in a portfolio. Institutions like pension funds and endowments have been utilizing them for years, and today, more and more individual investors are questioning why they have no alternative investments, and whether they should change their plan to include them. Watch this video to learn answers to the following questions:
What are alternative investments?
Is it important to have exposure to “alts” in your current portfolio?
Is it bad if you do not own any alternatives?
I heard alternative investments can be expensive – is that true? Does it matter?
What are the risks and benefits of adding alts to your investment strategy?
If you would like to learn more, click the thumbnail below to watch our recently-produced webinar about alternative investments.
What is the definition of fiduciary financial advisor, and why should you care? Here are 3 common considerations when deciding whether to partner with a fiduciary.
Duty of fiduciary financial advisor
Do you know that the only requirement a person needs to meet to be called a “financial advisor” is that they dispense financial advice? It’s true.
While it is also true that most financial advisors at major Wall Street firms—also called “wire-houses”— WANT what is best for you, it is important to understand that that they are employees first, and their FIRST professional obligation is to their employer, and NOT to you.
They are only required to do what is suitable for you, and they are bound by what is known as the “suitability standard of care.” They specifically are NOT legally required to act in your best interests 100% of the time. Put differently, they do not have the duty of fiduciary standard of client care.
In this video, Joseph Eschleman, an independent boutique wealth management firm, presents three important facts about how engaging a financial advisor specifically with a legal fiduciary responsibility should tilt the odds of success in your favor.
What is a fiduciary financial advisor – Definition of fiduciary
A fiduciary financial advisor is legally responsible to put their clients’ personal and financial interests before their own, and always act in their clients’ best interests, 100% of the time. Three things to consider when choosing between a wirehouse or independent fiduciary financial advisor:
The suitability standard, or simply doing what is suitable for a client, is much different than the fiduciary standard, or being legally bound to always act in a client’s best interests.
Investment brokers who work for broker-dealers (such as Merrill Lynch and Wells Fargo), and investment advisors who work for fully independent registered investment advisory (RIA) firms like Towerpoint Wealth, both offer financial, wealth, and investment planning, counsel, and advice.
However, they are not governed by the same professional standard.
Fiduciary advisors work directly for clients, and must place clients’ interests before their own, according to the Investment Advisers Act of 1940. They have the duty of fiduciary care. Investment brokers work for, and first serve, their broker-dealers, and must only ensure that their recommendations are suitable for their clients – this is known as the suitability standard. A financial advisor with fiduciary responsibility provides fee transparency, client-centered advice 100% of the time, deals with no competing interests, and is able to draw from a much larger pool of higher quality investments.
2. Breach of Duty—Legal Recourse
A breach of fiduciary duty occurs when it is proven that a financial advisor failed to act responsibly or in the complete best interests of a client. Usually, the actions are alleged to have benefitted the advisor’s interests, or the interests of a third party, instead of a client’s interests.
You have legal recourse in the case of a breach of fiduciary duty only if you are working with a fiduciary financial advisor.
3. Wall St. Investment Corp. vs Registered Independent Advisory Firm
If you have a relationship with an advisor who works for a major Wall Street firm, you do not have a fiduciary financial advisor. At Towerpoint Wealth, we should know – we worked for a major Wall Street firm for 18 years! It is impossible for anyone to act in a client’s best interests 100% of the time when operating within the constraints of the employee-employer relationship.
Now that you know the definition of fiduciary, it is important to understand that no designation, rule, or regulation will completely stop individuals who have intent to defraud other people. Despite this sad fact, engaging a financial advisor who has a legal fiduciary responsibility to you, like all of us here at Towerpoint Wealth, tilts the odds greatly in your favor.
This post focuses on the benefits of developing an estate plan to avoid probate and assure your assets are distributed according to your wishes and in a timely fashion.
What do you want for your loved ones when you are gone? A protracted, expensive public legal process (known as probate) or an efficient disposition of the assets in your estate?
Reasons for developing an estate plan
Most individuals want control over what happens to their assets when they pass away. And most people want the disposition of assets to be as easy, streamlined and tax efficient as possible for the people we leave behind.
A Last Will states who will be the executor of your estate, who will be the guardians of your minor children, who will receive your assets, and how and when they will receive them.
But having a will doesn’t help your heirs avoid probate, which is a time consuming, expensive, and public process. Developing an estate plan also involves creating a Living Trust. A Living Trust provides lifetime and after death property management, more flexibility in how your assets will be distributed, avoids probate, and most importantly, provides for immediate asset distribution. The benefits of an estate plan are clear.
Completing the estate planning process
However, it’s important to note that it’s not good enough to just have a Living Trust document. You must also fund the trust. This is done by retitling your assets in the name of the trust, and transferring them into the trust. If your assets have not been retitled and transferred into your trust, or you die without funding it, the trust will be of little benefit, as your estate will be subject to probate, and there will be significant estate tax consequences.
If you’re still asking, “What is an estate plan?” Or if the thought of developing an estate plan sounds tedious and overwhelming, you’ll want to reach out to a trusted person for more information, guidance, and support. While most don’t focus on estate planning, financial advisors can help you get your documents in order and often are an excellent resource to help you find an estate attorney.
Who should you name as the 401k beneficiaries of your pre-tax retirement accounts, and why?
You are working on your estate plan, filling out your estate planning documents, and trying to figure out who you should name as the beneficiary of your 401k account and IRAs. Simple – the kids, right? Not so fast. Who should be your 401k beneficiaries? Who should you name to inherit your IRAs? If you want to minimize taxes, who you name as your beneficiaries matters. This post, and the accompanying video, will help you understand non-spouse beneficiary distribution rules for inherited pre-tax IRAs and “regular” pre-tax 401ks.
Understanding the rules from an income tax standpoint might help you decide who to name as your beneficiary. Who inherits the assets you hold in your various retirement accounts could have a big impact on the amount of money that is ultimately received by your heirs vs given to Uncle Sam.
The beneficiary distribution rules for inherited pretax 401k accounts and IRAs when your spouse is not named as beneficiary are important for income tax and estate planning purposes.
The longer a beneficiary is able to wait before taking distributions from an inherited pretax account the longer the assets can grow without being taxed. Waiting longer to take a distribution allows the beneficiary to be more tactical about when to take distributions.
Restricted Stock Units | If you’re wondering how restricted stock units work, what is stock compensation, what are RSUs or what the taxation of restricted stock units looks like, we’re here to give you answers to your questions.
Restricted Stock Units, RSUs, are one type of stock compensation that companies can offer to their employees. This stock compensation allows your company to grant you shares, or RSUs. RSU compensation is different than the other common program many publicly traded companies offer to their employees, called an Employee Stock Purchase Plan (ESPP). ESPPs afford you an opportunity to buy shares of the company you work for at a discounted price.
Restricted Stock Units are a way for an employer to compensate employees by granting them actual shares of company stock. The grant is “restricted” because it is subject to a vesting schedule. Therefore, the employee typically only receives the shares after the vesting date. Once the shares are delivered, the grant is considered compensation income and your taxable income is the market value of the shares. When you later sell the shares, you will also recognize income on any appreciation over and above the market price of the shares back on the vesting date. Your holding period will determine whether the gain is subject to short-term ordinary income rates, or lower long-term capital gains rates.
How restricted stock units work?
Vesting schedules are often time-based, requiring you to work at the company for a certain period before your RSUs begin to vest. A common schedule is a “graded” vesting schedule, which means the vesting of the grant occurs in several portions. Vesting schedules can also have “cliff” vesting, which means 100% of the RSU grant vests after you have completed a specific stated service period of say three or four years. And finally, the vesting schedule can also be performance-based, meaning tied to company-specific or stock-market targets.
Taxation of restricted stock units
With RSUs, you are only taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares upon vesting. For the taxation of restricted stock units, the grant is considered compensation income, and is subject to mandatory federal, state, and local income and employment tax withholding. The most common practice of paying these taxes is by surrendering the necessary amount of newly delivered shares back to the company. This holds or “tenders” shares to cover your tax obligation. When you later sell the shares, you will also recognize income on any appreciation over and above the market price of the shares back on the vesting date. Your holding period will obviously determine whether the gain is subject to short-term ordinary income rates, or lower long-term capital gains rates. You’ve got to have a plan if you’re working on minimizing taxes.
RSUS vs ESPPs
While RSU’s may not be as complicated as ESPP plans, the tax planning for them is just as important. Understanding how restricted stock units work and the taxation of restricted stock units—including when your shares will vest—gives you the opportunity to plan in advance to ensure you can limit your overall tax liability.
What are the key provisions of the BBB bill, and what are the looming potential tax increases and decreases?
✅ Are you confused about the key provisions of the Build Back Better bill recently passed by the House?
✅ The Build Back Better Bill tax changes – should you worry, or be excited??!!
✅ Will you pay more in income taxes, or less, with the potential Build Back Better Bill tax changes?
✅ What are the other MAJOR provisions found within the $1.75 trillion Build Back Better bill?
✅ Will the tax changes in the Build Back Better Bill only affect the wealthy, or do everyday citizens also need to pay attention?
The Build Back Better Act is a huge piece of legislation – $1.75 trillion! Some have said that it could be the most consequential piece of economic legislation in the past 50 years! Will the proposed Build Back Better bill tax changes cause you to pay more, or less, to Uncle Sam if the proposed legislation passes? Should you be concerned about the proposed Build Back Better bill tax changes, or happy? Who is set to pay more, and who might pay less in taxes?
If you’ve asked yourself these questions, you’re not alone. In this easy-to-follow video, Joseph Eschleman, President of Towerpoint Wealth, will walk you through and help you answer these very important questions about not just the proposed tax changes in the Build Back Better bill, but also the MAJOR proposed changes to social services and programs, clean energy, and immigration as well.
SuccessfulLong Term Investing Strategies for Successful Long Term
Investors
Are you really a long term investor? Or do you just say you are a long term investor but behave more like a trader or a gambler, and fail to apply long term investment strategies to your portfolio? Watch our President, Joseph F. Eschleman, CIMA®, discuss exactly what it takes to truly act and behave like a long term investor, and what specific long term investing strategies and philosophies need to be developed and internalized to be a successful long term investor. Trying to successfully build, and protect, your wealth and “nest egg?” Watch this video to listen to Joseph outline seven key long term investing strategies and philosophies, as well as the exact emotional and behavioral characteristics needed to be a successful long term investor.
In this video, you can expect me to outline three key ingredients that, here at Towerpoint Wealth, we believe are *crucial* to being a SUCCESSFUL long term investor, and seven specific KEY long term investing strategies and principals that we believe NEED to be followed to successfully build, and protect, your wealth. You do want to successfully build and protect your wealth, don’t you?? Well then let’s get started!
SAYING you are a long term investor is easy; however, BEHAVING like a long-term investor is much more difficult. Throughout history, human behavior (specifically, fear and greed) has regularly gotten in the way of CONSISTENTLY following the long term investing strategies I am about to outline.
Or, put differently, as the great boxer Mike Tyson said, “Everybody has a plan until they get punched in the face.”
When the markets, economy, and politics are relatively “normal,” investing seems easy. However, when things get crazy, volatile, unbelievable, explosive, unpredictable, turbulent, harrowing, or unsettling, it becomes much more difficult to tolerate, endure, and absorb a major body blow to your “nest egg.”
Watching your money SHRINK can be a very emotional and traumatizing experience. And while there is no perfect recipe for becoming a successful long term investor, at Towerpoint Wealth we believe doing so all starts with three basic ingredients:
Consistent objectivity
Measured behavior
Disciplined thinking and execution
In addition to the inherently emotional nature of money, there are a myriad of uncontrollable variables populating the external environment we live in that makes it quite difficult to enjoy the benefits of being long term investor: The movements of the stock market. The vicissitudes of the US and global economy. The fickle nature of the political winds. Increases and declines in interest rates, income taxes, and inflation. These are just a few examples from a very lengthy list of items that are OUT OF OUR CONTROL. And while it is human nature for us to think (even to outright believe) that we have some control over many of these things, the truth is, if we want to truly be a successful long term investor, we must recognize and accept the things we do not control.
At Towerpoint Wealth, we believe that the most successful long-term investors and wealth-creators have a somewhat-unique capability, a skill, that allows them to maintain appropriate perspective, to exhibit a high degree of humility, and to be laser-focused on the bigger picture. Fortunately, this IS a skill that can be coached, cultivated, and learned, and is something that we have a relatively high degree of control over.
But let’s pause, make this more tangible, and highlight seven key long term investing strategies and principles that, at Towerpoint Wealth, we believe are necessary to be a successful long erm investor:
Have a plan and a strategy, and be disciplined in sticking to it, regardless of the things you have no control over
In opining about what we believe it takes to be a successful long-term investor, we would be remiss if we did not directly integrate Warren Buffett’s (aka the “Oracle of Omaha”) wisdom on this subject into this video. Warren said it best:
Someone is sitting in the shade today because someone planted a tree a long time ago.
Do you have a plan to properly manage and coordinate all of your financial affairs, and a strategy to be a successful long term investor by growing and protecting your wealth and investment portfolio, even during turbulent times?
If so, are you being disciplined in consistently following it? If you have concerns, or simply would like to discuss how you can apply the long-term investment principles discussed above, we welcome having a conversation with you. Click HERE to message us, as we regularly have no-strings-attached conversations about these issues, and are happy to be an objective resource for you as you begin to consider your personal and financial circumstances further.
At Towerpoint Wealth, and UNLIIKE advisors at the major Wall Street firms, we are a fiduciary to YOU, and have a legal obligation to act in your best interests 100% of the time. If you have concerns, or simply would like to discuss how you can apply the long term investing strategies and philosophies I’ve discussed today, we welcome beginning to get to know you, and to have you get to know us. [SMILE} So let’s talk! Message us in the comments section, call us at 916-405-9150, or email us at info@towerpointwealth.com, to discuss your circumstances further.
Click below to watch our Joseph Eschleman, and learn more about:
1. The mechanics of both bills, and the current status of the soap opera in D.C., as the U.S. House of Representatives and the U.S. Senate continue to posture, grandstand, debate, and negotiate
2. Learn about the specifics regarding the looming federal income tax increases that may soon be coming
3. SPECIFIC ideas on 4Q, 2021 tax planning strategies that you can apply before the new year (and potentially, the new taxes) is upon us
If you think federal income taxes will remain low, then this video is NOT for you; if you think we are in for federal income tax increases, then click thumbs up and pay attention to these ideas!
Imagine you are offered a job, and you are counting on it to provide income for you and your family for many, many years. But you didn’t ask about 1.) starting date, 2.) salary, nor 3.) benefits.
Now, change “job” to “Social Security” and you get a sense of the general lack of knowledge many Americans have about this bedrock retirement income stream.
Are you, or will you be, eligible for Social Security benefits? Do you have concerns about the solvency of the Social Security system? Are you confused about when to start taking your social security benefit—about whether to take it early or wait? Are there things you don’t understand about spousal benefits? You aren’t alone.
Towerpoint Wealth is a boutique wealth management firm in downtown Sacramento. In this post, Towerpoint’s CEO, Joseph Eschleman, will help you answer these important questions about your social security benefits.
Social Security is an essential retirement income stream for many Americans, and it is also a confusing, complicated, and evolving system, one that is next to impossible to properly navigate without a complete and thorough understanding of the rules. Importantly, knowing when to take Social Security —claiming your Social Security benefits at the RIGHT TIME—means SIGNIFICANTLY more money in your pocket.
With this post, we seek to accomplish three things: 1.) social security explained 2.) review a number of important yet oftentimes misunderstood filing strategies, and 3.) discuss what lies in store for the future of the $2.9 TRILLION Social Security trust fund.
Social Security Benefits 101
Back in 1935, President Theodore Roosevelt signed the Social Security Act, creating a social insurance program designed to give older Americans an additional income stream in retirement. Current American workers pay Social Security taxes to provide benefits to those who are eligible to receive Social Security right now.
Typically, the amount you receive from Social Security will increase or decrease based on when you elect to claim your benefit, relative to what is known as your FRA, or full retirement age. When you were born will determine what your FRA is. If you were born between 1943-1954, your FRA is 66. If you were born after 1954 but before 1960, the FRA gradually climbs from 66 towards 67, based on the year you were born, increasing two months every year. For example, if you were born in 1956, your FRA would be 66 + four months. Lastly, and much more simply, if you were born in 1960 and beyond, your FRA is 67.
To be eligible for Social Security benefits, you must earn a minimum of 40 “credits” throughout your working career. You can earn up to four credits a year, so it takes a minimum of 10 full years of work to qualify for Social Security.
Your specific Social Security benefit is computed based on the 35 calendar years in which you earned the MOST money. You can increase your Social Security benefit at any time by replacing a low, or zero, income year with a year in which you earned a higher income. Importantly, Social Security benefits do have a maximum, depending on the age you retire. For someone at full retirement age (or FRA), the maximum monthly benefit is $3,113 in 2021. If you wait until age 70 to file, the maximum monthly Social Security benefit amount is $3,895.
Social Security protects you against inflation through what are known as cost of living adjustments, or COLAs, which help beneficiaries keep up with ever-increasing living expenses. This inflation protection is extremely valuable, especially in today’s inflationary environment. While the Social Security COLA for 2021 was “only” 1.3%, many estimate that the COLA in 2022 could be higher than 6%!
When to Take Social Security – Social Security Explained
Now that you better understand how Social Security works, let’s discuss optimizing when and how to take it. Many people have multiple sources of income in retirement, which can impact the decision about when to claim Social Security. This is an extremely important decision, and here at Towerpoint Wealth, it is one that we work closely with our clients to get right, as there are a myriad of variables, rules, and assumptions that must be accounted for when developing a customized strategy for yourself.
You are allowed to begin collecting Social Security as early as age 62, but taking your benefit early will result in a major haircut, reducing your benefit by as much as 25 or 30% as compared to waiting until you reach your FRA. Obviously waiting until your full retirement age will result in receiving 100% of your earned benefits, but importantly, you can also choose to delay claiming your Social Security benefit, all the way to age 70 if you would like.
Should I wait to take Social Security?
There is a big economic incentive to waiting, as your monthly Social Security benefit will grow an additional 8% (!) a year until age 70. Add in any cost of living adjustments, which also are included if you wait, and the financial incentive to delay claiming Social Security becomes even greater. With certain Towerpoint Wealth clients, we will set up a supplemental, or “bridge income” plan, and have you temporarily withdraw more money from your nest egg for just a few years to allow your Social Security benefit time to grow larger. Additionally, waiting to claim your Social Security income can benefit your heirs, as a higher earning spouse can ensure their lower-earning spouse will receive a higher survivor benefit in the event the higher-earning spouse dies first. Not always fun to talk or think about, but life throws us lots of twists and turns that need to be considered.
Some individuals implement what is known as a “split strategy” in which the higher wage earner waits to take their benefit, but the lower wage earner claims their Social Security early, getting cash flowing into the household sooner, and yet ensuring that whoever outlives the other will receives the highest possible survivor benefit.
Children, family, and divorcee benefits
Additionally, unmarried children can receive Social Security benefits if they are younger than age 18, or between 18 and 19 and a full time student, or 18 or older with a disability that began before age 22. To get benefits, a child must have a parent who is disabled or retired and entitled to Social Security benefits; or a parent who died after having worked long enough in a job where they paid Social Security taxes. Benefits stop when your child reaches age 18 unless your child is a student or disabled.
Within a family, a child can receive up to half of the parent’s full retirement or disability benefit. If a child receives Survivors benefits, he or she can get up to 75 percent of the deceased parent’s basic Social Security benefit.
Widows and widowers are also eligible for Social Security benefits, as are divorcees. Just like a regular spousal benefit, you can get up to 50% of your ex-spouse’s benefit, or less if you claim early, before full retirement age.
Is your head spinning yet??
You can reverse your Social Security claim
Complicating things further, you can always “take a mulligan” and undo a Social Security claiming decision, and while Social Security benefits were tax free prior to 1984, they aren’t anymore, and you will have to pay federal taxes on your Social Security benefit. For those who are upper middle income or upper income, 85% of a security benefit is taxable, and 15% is tax free. Additionally, 13 states also assess state income taxes on benefits.
Social Security Solutions
Now, it is no secret that the Social Security system is stressed and is facing challenges. With the COVID-19 pandemic causing record-high unemployment, coupled with many people retiring or changing careers, there are fewer people paying into the system now than ever, and estimates that Social Security will run out of funds even faster than projected even two years ago have created large concerns.
However, it is very important to realize that changes to the system have occurred regularly since its birth in 1935, and politicians, while reticent to make difficult decisions until they absolutely have to, have consistently drafted legislation to address these Social Security financial problems and economic shortfalls. And here at Towerpoint Wealth, we feel that our elected leaders have quite a few options at their disposal: 1.) Increasing the Social Security, or FICA, payroll tax. Currently, each worker pays 6.2% and the employer also pays 6.2%, for a 12.4% total payroll tax. Increasing this tax, while not popular, is always an option to shore up the system. 2.) Increasing the FRA, or full retirement age, for younger workers, has historical precedent and could be politically attractive to provide economic support to the Social Security system. 3.) Instead of tying Social Security COLA benefit increases to the consumer price index, or CPA, the government could make a shift to what is known as the “Chained CPI,” which reduces the amount a benefit will go up over time, and 4.) our politicians could always increase the earnings CAP on Social Security taxes.
Currently, the limit on the amount of earnings subject to Social Security taxes is $142,800. If the cap were fully removed, the Social Security system would be fully solvent. President Biden’s tax plan proposes a donut hole for Social Security taxes, where the first $142,800 is taxed, as well as any income over $400,000. Needless to say, it remains to be seen what solutions will be implemented, but fortunately the government has a number of arrows in its quiver to address these shortfalls. Bottom line – if you want to take Social Security early, we strongly encourage you to consider two things: 1. “The system is going bankrupt” is a poor reason for doing so, and 2. The pay raise that you earn by waiting is compelling.
Reach out to Discuss a Sound Social Security Strategy
Ensuring that you have a sound and well thought out Social Security claiming strategy can literally mean hundreds of thousands of additional dollars in benefits in your pocket. Please share this article with your friends who are thinking about Social Security. And please, email us at info@towerpointwealth.com to begin a conversation about developing an optimized strategy for you, to determine the best year and month for you and/or your spouse to begin claiming your Social Security benefit.
Employee Stock Purchase Plan | If you are an employee of a publicly traded company, it most likely offers an employee stock purchase plan, or ESPP for short (also sometimes called a section 423 plan). These are excellent plans to take advantage of, as they allow employees to purchase company stock at a discount. However, what most people do not fully understand are the tax consequences of selling the stock.
With an ESPP, an employee is not taxed at the time they purchase shares, but instead only when they sell. As you may expect, the tax consequences of the sale will be different, depending specifically on how long the employee has held the shares. This holding period will determine if the sale is a “qualifying disposition” or “disqualifying disposition.”
Oftentimes, Employee Stock Purchase Plans allow employees to use after-tax payroll deductions to purchase company stock at a discount, which can be as high as 15% off the actual market price of the stock. However, what most people do not fully understand are the tax consequences of selling the stock acquired through these plans.
Taxation rules of ESPPs
Understanding taxation rules associated with ESPPs means you have an understanding of the importance of a “disposition strategy” that will produce the best economic result for you. With an ESPP, or qualified Section 423 plan, as we’ve said, you are not taxed at the time the shares are purchased, but instead only when you sell.
Employees can generally sell shares at any time, which is great if you have immediate cash needs, or want to reinvest the money into other assets. However, the tax consequences of the sale depend specifically on how long you have held the shares. This holding period will determine if the sale is a “qualifying disposition” or “disqualifying disposition,” which governs how much of the gain will be taxed at capital gains rates, or at less favorable ordinary income rates.
A qualifying disposition occurs when you sell your shares after holding them for at least one year from the purchase date and at least two years from the offering date. The rules say that you will pay ordinary income tax on the lesser of either 1) The discount offered based on the offering date price, or 2) the gain between the actual purchase price and the final sale price. The remainder of the gain, if there is one, will be taxed at the more favorable long-term capital gains rate.
If you don’t meet the holding period requirements for a qualifying disposition, then by default you end up with a disqualifying disposition. You will pay “regular” ordinary income tax on the difference between the actual purchase price and the purchase date market price, and you’ll pay capital gain tax rates on the difference between the purchase date price and the final sales price. It’s a little complicated, we know.
As you can see, it is incredibly important you understand the ESPP tax rules and how they can impact the amount of money you end up keeping in your pocket, if and when you decide to sell any shares you own in your section 423 plan.
Feel free to contact Towerpoint Wealth on LinkedIn, Facebook, or Instagram to discuss a disposition strategy that is best for you given your circumstances and financial goals. What are the taxation rules associated with Employee Stock Purchase Plans—ESPPs—and can you be sure you’re minimizing taxes? It’s important to have a disposition strategy that will produce the best economic result for you.
