Client Case Studies- How We Can Help*
Young Couple
Ryan and Amy are 32 years old with a combined income of $150,000. Their 401k plans are invested in 50% bonds and 50% U.S. stocks. They have a brokerage account that is 100% invested in U.S. stocks and they are saving for a down payment on a house. They also have $10,000 in credit card debt with an 18% interest rate and $10,000 in auto loan debt with a 6% interest rate.
Goal: Save for down payment on a mortgage that will be needed between six months from now and two years.
Plan: Because this money has a short-term time horizon and cannot be put at risk, we moved it from stocks to six month FDIC-insured bank cds, rolling it over every six months.
Goal: Pay down debt in the smartest way possible.
Plan: They will pay down the credit card debt first before any other debt. No extra payments should be made on either the auto debt or the upcoming mortgage debt until the credit card is paid off. We also had them take some of the money from each paycheck they were putting towards their 401k plans to help pay off the credit card debt first.
Goal: Retire by age 62 with $2 million in 401k plans.
Plan: They have 30 years until retirement. Currently their mix of investments is too conservative for their end goal and considering how long their time horizon is. We moved them to a mix of 10% bonds, 45% U.S. stocks, and 45% emerging market funds.
Couple in Their 50s With Cash Needs
Frank and Julie are in their mid 50s and have most of their wealth tied up in a regular IRA and a Roth IRA, split about evenly at $1 million in each. They plan on retiring in eight years and their investment mix in each fund is 80% U.S. stocks and 20% bonds.
Goal: Retire with at least $1.5 million.
Plan: Their investment mix is way too risky given their time horizon for retirement and goal of having $1.5 million at retirement. We moved them to 75% short-term, safe bond funds and 25% stable cash flow, high dividend paying stocks.
Goal: Give $200,000 to their son who is having health and debt problems.
Plan: Take the money out of the Roth IRA. Money that is in the Roth IRA has already been taxed and can therefore be withdrawn penalty-free as long as it is no more than the total amounts deposited over the years. Also, we analyzed their overall estate and gift tax situation and the gift to their son of $200,000 will not be taxed.
Wealthy Restaurant Owner and Widower
John is a 60 year old restaurant owner and has $5 million saved, all in conservative investments.
Goal: John wants to leave money to his children and does not want to pay any estate tax.
Plan: Give away $13,000 (currently the amount that is allowed tax-free) each year to each child until John is satisfied with the total amounts. Work with an estate attorney to set up a bypass trust with his children as beneficiaries.
Employee With Vested Non-Qualified Stock Options
Tim has 100,000 vested stock options in his company. The strike price is $2 a share and the stock price is now $10. His net worth, not including his vested options, totals $200,000 and he plans to retire in five years.
Goal: Tim wants to know if he should hold onto his options or if it's more prudent to diversify.
Plan: Tim has $800,000 worth of his company's stock in vested stock options. This represents 80% of his overall wealth. Given that he plans to retire in five years it is imperative that he diversify some of his holdings. The plan is to have John sell 50% of his stock options in one sale then 10% each month going forward. Since these are non-qualified options Tim has to pay income tax on all of the gains. So it is important to take into account what tax bracket he will be in next year to determine the timing of his sales.
Employee With Restricted Stock
Susan has received $100,000 in restricted stock that vests over the next two years. She is concerned about paying income tax on any gains that migh occur in the stock during this time. She is also confident that the stock will go up during the next two years.
Goal: Susan must decide whether or not she wants to pay income taxes on the $100,000 today or wait until the stock vests. If she decides to pay today, she must file a Section 83b election. If she doesn't file the Section 83b election, all gains in the stock while it vests will be taxed at her income tax rate.
Plan: Susan is confident that the stock will rise, she does not want to pay income taxes on any gains while the stock is vesting, and she has the money to pay income taxes today on the $100,000. Therefore she will file the Section 83b election and pay income taxes on the restricted stock today. This means that any gains on the stock over the next two years will be subject to long-term capital gains taxes and not the ordinary income tax rate.
*These are representative examples and may or may not represent actual clients.
Ryan and Amy are 32 years old with a combined income of $150,000. Their 401k plans are invested in 50% bonds and 50% U.S. stocks. They have a brokerage account that is 100% invested in U.S. stocks and they are saving for a down payment on a house. They also have $10,000 in credit card debt with an 18% interest rate and $10,000 in auto loan debt with a 6% interest rate.
Goal: Save for down payment on a mortgage that will be needed between six months from now and two years.
Plan: Because this money has a short-term time horizon and cannot be put at risk, we moved it from stocks to six month FDIC-insured bank cds, rolling it over every six months.
Goal: Pay down debt in the smartest way possible.
Plan: They will pay down the credit card debt first before any other debt. No extra payments should be made on either the auto debt or the upcoming mortgage debt until the credit card is paid off. We also had them take some of the money from each paycheck they were putting towards their 401k plans to help pay off the credit card debt first.
Goal: Retire by age 62 with $2 million in 401k plans.
Plan: They have 30 years until retirement. Currently their mix of investments is too conservative for their end goal and considering how long their time horizon is. We moved them to a mix of 10% bonds, 45% U.S. stocks, and 45% emerging market funds.
Couple in Their 50s With Cash Needs
Frank and Julie are in their mid 50s and have most of their wealth tied up in a regular IRA and a Roth IRA, split about evenly at $1 million in each. They plan on retiring in eight years and their investment mix in each fund is 80% U.S. stocks and 20% bonds.
Goal: Retire with at least $1.5 million.
Plan: Their investment mix is way too risky given their time horizon for retirement and goal of having $1.5 million at retirement. We moved them to 75% short-term, safe bond funds and 25% stable cash flow, high dividend paying stocks.
Goal: Give $200,000 to their son who is having health and debt problems.
Plan: Take the money out of the Roth IRA. Money that is in the Roth IRA has already been taxed and can therefore be withdrawn penalty-free as long as it is no more than the total amounts deposited over the years. Also, we analyzed their overall estate and gift tax situation and the gift to their son of $200,000 will not be taxed.
Wealthy Restaurant Owner and Widower
John is a 60 year old restaurant owner and has $5 million saved, all in conservative investments.
Goal: John wants to leave money to his children and does not want to pay any estate tax.
Plan: Give away $13,000 (currently the amount that is allowed tax-free) each year to each child until John is satisfied with the total amounts. Work with an estate attorney to set up a bypass trust with his children as beneficiaries.
Employee With Vested Non-Qualified Stock Options
Tim has 100,000 vested stock options in his company. The strike price is $2 a share and the stock price is now $10. His net worth, not including his vested options, totals $200,000 and he plans to retire in five years.
Goal: Tim wants to know if he should hold onto his options or if it's more prudent to diversify.
Plan: Tim has $800,000 worth of his company's stock in vested stock options. This represents 80% of his overall wealth. Given that he plans to retire in five years it is imperative that he diversify some of his holdings. The plan is to have John sell 50% of his stock options in one sale then 10% each month going forward. Since these are non-qualified options Tim has to pay income tax on all of the gains. So it is important to take into account what tax bracket he will be in next year to determine the timing of his sales.
Employee With Restricted Stock
Susan has received $100,000 in restricted stock that vests over the next two years. She is concerned about paying income tax on any gains that migh occur in the stock during this time. She is also confident that the stock will go up during the next two years.
Goal: Susan must decide whether or not she wants to pay income taxes on the $100,000 today or wait until the stock vests. If she decides to pay today, she must file a Section 83b election. If she doesn't file the Section 83b election, all gains in the stock while it vests will be taxed at her income tax rate.
Plan: Susan is confident that the stock will rise, she does not want to pay income taxes on any gains while the stock is vesting, and she has the money to pay income taxes today on the $100,000. Therefore she will file the Section 83b election and pay income taxes on the restricted stock today. This means that any gains on the stock over the next two years will be subject to long-term capital gains taxes and not the ordinary income tax rate.
*These are representative examples and may or may not represent actual clients.