Planning For Medicare Benefits

Below is a general breakdown of Medicare benefits, programs, and costs as well as an array of issues that need to be addressed in order to successfully plan for retirement and your health care needs.

Why is this important?

Knowing what medical coverage you will have and when to sign up is extremely important so that you don’t end up with massive out-of-pocket costs for medical care. Failing to sign-up correctly for Medicare can also result in penalties. What’s more important than your health? Nothing is and your finances are an important part of your health and wellbeing so it pays to understand these subjects.

For a more comprehensive view of Medicare visit the official government webpage that will give you personalized and specific information regarding healthcare benefits. A lot of the following summarized information comes from the official government sources on Medicare and Medicaid. However, there are too many individual factors to cover here that could greatly change the way you approach Medicare which is why it is important for you to further research this topic and allow me to help you build a plan. This is a complicated and multi-faceted subject and it’s too important to not understand so use your resources.

As your financial advisor, I am here to help you navigate all of the issues and include you in forming the best possible plan and strategy for a successful financial future. Also consult your tax specialist, former or current Human Resources department, internet web pages, and to help you with this complex subject.

What Exactly Is Medicare?

In short, it is the federal health insurance program for:

  • People who are 65 or older
    • Or younger with certain disabilities
  • People with End-Stage Renal Disease (ESRD)

Medicare is overseen by The Center for Medicare & Medicaid Services (CMS) and works in conjunction with Social Security.

The government suggests that you take the following steps to familiarize yourself with Medicare:

  • Learn about the different elements and ‘Parts’ of Medicare
  • Learn when you will be eligible for Medicare and whether or not you will get Medicare automatically or if you will need to actively enroll
  • Decide if you want both Part A and Part B (or Part C)
  • Learn how to establish the health coverage that best fits your needs (Similar to deciding on what Medicare Parts you want, or don’t want)
  • Learn about necessary actions to take for your first year of Medicare

Medicare Is Offered In Different ‘Parts’

  • Part A (Hospital Insurance): Generally covers inpatient hospital, skilled nursing care, hospice, and some home health services
  • Part B (Medical Insurance): Usually covers outpatient care such as doctor visits, medical supplies, and some preventative care
  • Part C (aka Medicare Advantage): Is a bundled alternative to Medicare Parts A and B plus D
  • Part D (Prescription drug coverage): Part D adds prescription coverage to :
    • Original Medicare
    • Some Medicare Cost Plans
    • Some Medicare Private-Fee-for-Service Plans
    • Medicare Medical Savings Account Plans

There are two main ways of getting and using Medicare:

  • Enrolling in Original Medicare (enrolling in Parts A & B)
  • Enrolling in Medicare Advantage Plan (Part C)

Original Medicare is health insurance provided by Medicare and allows you to choose the providers and services that accept Medicare. You will pay the Part A and B premiums (for most, Part A has no monthly cost) and you can choose to purchase supplemental insurance that may help cover those premiums. You would also have to choose a prescription drug plan as well- these are provided by private insurers.

The Medicare Advantage Plan is provided by private insurers and includes Medicare Parts A & B, and usually consists of a prescription drug plan. The private company will have its own network of providers, much like an HMO or a PPO, and you will have associated monthly premiums. The private companies usually bundle a prescription drug plan into the plan as well.

According to the official Medicare website, the Medicare Advantage Plan is estimated to have lower out-of-pocket expenses compared to Original Medicare (see below for more details).

Sometimes supplemental insurance (which would be an additional insurance policy) is cost effective for those that choose Original Medicare. Supplemental insurance can help with the costs of premiums, copayments, and coinsurance costs.

Will you get Medicare automatically?

In most cases yes, you’ll automatically get Part A and Part B starting the first day of the month that you turn 65 but it depends on your Social Security benefits and a few other qualifying factors.

Who gets Medicare Parts A & B automatically?

  • If you are going to receive Social Security or receiving Railroad Retirement Board (RRB) at least 4 months prior to turning 65
  • If younger than 65 and disabled and after having received Social Security or RRB benefits for greater than 24 months
  • Those with ALS will automatically get Parts A & B on the first month of disability benefits
  • Those with ESRD and choose to enroll in Medicare. When exactly you receive Medicare benefits will depend on what type, if any, of additional health insurance you have and the completion of certain training programs

When do you need to sign-up for Medicare?

When eligible for Medicare, you have a 7-month Initial Enrollment Period to sign up for Part A and/or Part B starting from 3 months prior to turning 65 and ending 3 months after the month in which you turn 65 (a total of 7 months).

Waiting until your birthday month or longer could cause a gap in health care coverage and a possible penalty.

You can sign up for Part A and/or Part B during the General Enrollment Period between January 1–March 31:

  • You didn’t sign up when you were first eligible
  • You aren’t eligible for a Special Enrollment Period (SEP)

You qualify for a SEP to sign up for Part A and/or B at any time if:

  • You or your spouse (or family member if you’re disabled) is working
  • You’re covered by a group health plan through the employer

You will have an 8-month SEP to sign up for Part A and/or B that starts at if one of the following occurs:

  • The month after the employment ends
  • The month after group health plan insurance based on current employment ends

Usually, as long as you qualify for a SEP, a late enrollment penalty won’t be applied.

Consequence of failing to sign up for Part B on time

Delaying signing up for Part B can lead to a late enrollment penalty, which can have long term consequences for your wallet.

The late enrollment penalty can result in a Part B monthly premium that is increased by an additional  “10% of the standard premium for each full 12-month period that you could have had Part B, but didn’t sign up for it.” You may not be eligible to enroll in Part B for several months, further delaying Part B coverage.

If 24 months go by before enrolling and receiving Part B, which equates to two 12-month periods, the monthly premium would increase by 20%

The real kicker? That 10%, 20%, or worse penalty, remains in effect for the life of Part B coverage.

A similar late enrollment penalty is applied to Part A as well, however, the penalty is not paid for over the lifetime of Part A coverage as with the Part B penalty.

Delaying Enrollment

Some people may choose to delay enrolling in Medicare Part A and B, but this requires careful planning and knowledge of the rules.

Those over 65 and continuing to work may choose to delay enrollment to continue to take advantage of an HSA while using a High Deductible Health Plan or if they have adequate insurance through their employer (or a spouse).

A major determining factor in delaying enrollment will be the size of the employer. If the employer has fewer than 20 employees, your insurance will pay secondary to Medicare. In this case, you would want primary insurance in the form of Medicare. If your employer has more than 20 employers, Medicare would be secondary insurance and pay after your primary insurance offered at work.

Some people may not need Part B

Delaying Part B Medicare coverage is mainly dependent on other available health care coverage. People seeking to avoid the cost of Part B may want to delay enrolling. Several exceptions exist and require an individualized assessment that I can help you with.

2019 Medicare Costs

Part A

Many people, if not most, will have “premium-free Part A” if:

  • You already get retirement benefits from Social Security or the Railroad Retirement Board
  • You’re eligible to get Social Security or Railroad benefits but haven’t filed for them yet
  • You or your spouse had Medicare-covered government employment
  • If under 65:
    • You got Social Security or Railroad Retirement Board disability benefits for 24 months
    • You have End-Stage Renal Disease (ESRD)

If you have to purchase Part A, the cost will depend on the length of time that you (or a spouse) paid Medicare taxes

  • If you paid these taxes for more than 30 quarters, the monthly premium can be up to $240
  • Paying for less than 30 quarters, the monthly premium would be up to $437

The deductible for in-patient hospital admission is $1,364. Depending on the length of stay, coinsurance charges are applied and are scaled up as length of stay increases.

  • 0-60 days: $0
  • 61-90 days: $341 per day
  • Over 91 days: $682 per day for each “lifetime reserve day” (up to 60 days over Part A lifetime)
  • Beyond lifetime reserve days: Full cost


The way you set up your particular insurance plan will greatly affect the actual premium amount as well as other out-of-pocket costs.


Part B

Monthly Part B premiums are income & tax-filing status dependent.

The following table is from The Centers for Medicare & Medicaid Services, updated for 2019. The premiums were raised slightly from 2018, however, there was also a protection clause included that does not raise the premium to anything “greater than the increase in…social security benefits.”

In addition to the premiums below, you may have to pay an additional amount if you are a high-income earner, which I will discuss below.

Beneficiaries who file individual tax returns with income:Beneficiaries who file joint tax returns with income:Income-related monthly adjustment amountTotal monthly premium amount
Less than or equal to $85,000Less than or equal to $170,000$0.00$135.50
Greater than $85,000 and less than or equal to $107,000Greater than $170,000 and less than or equal to $214,000$54.10$189.60
Greater than $107,000 and less than or equal to $133,500Greater than $214,000 and less than or equal to $267,000$135.40$270.90
Greater than  $133,500 and less than or equal to $160,000Greater than $267,000 and less than or equal to $320,000$216.70$352.20
Greater than $160,000 and less than $500,000Greater than $320,000 and less than $750,000$297.90$433.40
Greater than or equal to $500,000Greater than or equal to $750,000$325.00$460.50
Beneficiaries who are married and lived with their spouses at any time during the year, but who file separate tax returns from their spouses:Income-related monthly adjustment amountTotal monthly premium amount
Less than or equal to $85,000$0.00$135.50
Greater than $85,000 and less than $415,000$297.90$433.40
Greater than or equal to $415,000$325.00$460.50

Part C and D costs are less straightforward and are plan specific.

The Income-Related Monthly Adjustment Amount (IRMAA)

IRMAA refers to an additional surcharge that is applied to high-income earners. IRMAA will be applied to you if you have a modified adjusted gross income that:

  • Exceeds $85,000 if single
  • Exceeds $170,000 if married and filing jointly

This surcharge is in addition to the Part B monthly premiums boosting it from the standard of $135.50/mo to anywhere from $189.50 to $460.50. It may also increase Part D premiums as well.

You Are Probably Wondering: How Can I Save Money On Medicare?

First, if you have been paying the IRMAA surcharge and your income has dropped recently due to marriage, divorce, or death of a spouse, you can fill out form SSA-44 to petition a review and possible cancelation of the IRMAA.

Search for a new plan arrangement, but be careful to analyze the benefit of having lower premiums but higher deductibles and other out-of-pocket expenses. This would negate the cost-effectiveness in the long run. Medicare plans to roll out a “Find A Plan” feature on its page around October 2019 that should aid in searching for a new plan.

Lower your taxable income by contributing to pre-tax accounts such as a traditional 401(k) (or other similar plans such as a 401(a), 403(b), etc.), a traditional IRA, or HSA. Also, HSA funds can be used to pay for Medicare premiums and won’t be calculated in the IRMAA surcharge (Yet another reason to take advantage of the services of expert financial planners and tax preparers).

Charitable donations from a tax-advantaged account made after age 70 ½ which will count as a mandatory distribution but won’t be part of your adjusted income.

Speak with me about all of your options for reducing taxable income so that we can make an individualized plan for your success.

Health Savings Account and Medicare

If you enroll in Medicare and also have an HSA, there are some important rules that you must know.

If you enroll in Part A and/or B, you will not be able to contribute pre-tax dollars to a Health Savings Account (HSA) anymore. Recall that in order to be eligible for an HSA, you have to have a High Deductible Health Plan and no other insurance coverage. Medicare counts as qualified health coverage and therefore disallows you to contribute money to an HSA. If you are going to enroll in Medicare, stop contributing to your HSA at least 6 months prior to Medical enrollment because Medicare benefits are retroactive. If you were to contribute to your HSA up until starting with Medicare benefits, you would be rewarded with a tax penalty from the IRS.

You will be able to keep the HSA and withdraw money from the account to pay for medical expenses after enrolling in Medicare. Only contributions to an HSA are affected.

Choosing to delay Medicare enrollment would be one way that you could continue to take advantage of HSA contributions. However, depending on your situation, this may not be possible or could leave you very vulnerable to having little health coverage with huge out-of-pocket expenses. If you choose to delay Medicare enrollment, you would also have to delay receiving Social Security benefits. Receiving Social Security benefits automatically enrolls many people into Medicare and you cannot receive those benefits and at the same time delay Medicare.

Remember that we discussed some of the reasons that people may delay enrolling in Medicare Parts A and B above. Choosing to delay Medicare enrollment will be largely based on whether or not Medicare is the primary or secondary insurer (which is dependent on employer size). If it is primary, as is the case if your employer has fewer than 20 employees, it would be smarter to enroll in Medicare even if means losing the ability to contribute to an HSA.

What Medicare Doesn’t Cover

It’s great to know what Medicare pays for, but maybe more important is to know what’s not covered so that you can appropriately plan.

According to Medicare, typical expenses not paid for by Medicare include:

  • Long-term care
  • Most dental care
  • Eye exams related to prescribing glasses
  • Dentures
  • Cosmetic surgery
  • Acupuncture
  • Hearing aids and exams for fitting them
  • Routine foot care

Unfortunately, some of those services can cause extreme financial and emotional strain.

So what can you do about it?

Plan ahead because this is a common area that is missed in many people’s financial and retirement plans.

Look into purchasing Long Term Care (LTC) and Dental insurance. The longer you wait to secure LTC insurance, the more you’ll pay for premiums.

According to the official government authority on LTC, monthly costs in a LTC facility can reach almost $7,000, and that’s not even for a private room! Hiring an in-home health aide goes for about $20.00 an hour, and higher level care, such as nursing care, costs even more. Usually, LTC stays aren’t short lasting either so don’t put yourself in the position of having to find a way to cover such exorbitant expenses.

Additional ways to pay for LTC, pending eligibility:

  • Add a rider to an existing life insurance policy
  • Health Savings Account
  • Veteran benefits
  • Medicaid

Medicaid will pay for a very limited, and probably a disappointing portion of LTC. Medicaid will pay for some LTC, for a maximum of 100 days, and only after nearly all other avenues of paying for LTC have been exhausted. Furthermore, not every facility even accepts Medicaid.

Qualifying for Medicaid is not very straightforward either. Eligibility is based on several factors including income levels that are scaled to family size and medical needs. Medicaid should be viewed as a last resort for paying for LTC as it was intended to provide basic needs to the people of our society with the fewest assets and ability to pay.

This really is just an introduction into Medicare. There are many more pieces to it and successfully planning for and transitioning into Medicare requires substantial previous planning. You have worked too hard to not adequately plan for healthcare coverage in retirement.

I am always here to help you navigate these complex topics and prepare a holistic financial plan for your future. Contact me today to schedule a time to talk about all of your financial needs.


Financial Checklist For Pregnancy

There is no denying that having a baby is life-changing and expecting an infant is overwhelming and wonderful.

Learning that you are going to be a parent brings the future into sharper focus and you realize it’s time to start planning for the changes that are coming your way.

Financially, expectant parents face a range of expenses from medical care, to baby equipment, to estate planning.  Navigating these pregnancy costs requires a bit of an investment and more than likely, professional assistance.

Here’s what to plan for financially and what to review before ‘Baby’ arrives.


Medical Insurance

According to Business Insider, the average medical cost of having a baby in the US is $10,808.

The cost varies, of course, and depends on many factors. Amongst these are where you live, your insurance coverage, how you deliver (vaginally or cesarean), and the prenatal treatments/tests you may need.

For example, a cesarean section costs can range from $5,000 to over $30,000! Of course, your insurance will be paying a part of this cost.

What is the best way to estimate your costs associated with pregnancy?

Call your insurance provider! This is the best method for discovering your costs.

It’s important to contact your health insurance provider to find out the details of your coverage and ask questions that will help you estimate the charges for:

  • Prenatal care
  • Co-pays/Deductible
  • Out of pocket expenses
  • Hospital stay
  • Emergency costs
  • Post-natal care

Determining these costs in advance allows you to get the most out of your insurance and extra savings from FSA/HSA accounts.

Your health insurance provider can also provide you with a list of in-network providers, required pre-registration and/or possible restrictions specific to your coverage.

When does your baby obtain medical insurance?

Now is also a good time to confirm when the baby will be covered under the policy and what steps you will need to take to have them added. Typically, there is a 30 day period for enrolling a newborn, if it’s missed you may have to wait until your company’s annual open enrollment period. Missing open enrollment could mean that you are exposed to larger out-of-pocket costs if your child needs any care.

Estate Planning

There are 5 essential items new parents need to consider when Estate Planning, according to a recent article from Kiplinger financial planning:

  1. Health Care Proxy and Executing a Power of Attorney
    – These are considered “Living Documents” and ensure that another adult  has the power to make decisions for an adult who is incapacitated
  2. Naming a Guardian and a Custodial Trustee
    – These two individuals will work as a team; one to care for the child and the other to care for your child’s finances
  3.  Creating/Updating A Will and Possibly a Trust
    – These documents outline your wishes after you pass. Keep in mind that if you don’t create a will or update it after you have a child, you’re leaving your most important assets, in the hands of the courts (a process called probate)
    – Probate is extremely expensive and is a bureaucratic drag
  4. Evaluating Life Insurance Coverage
    – Purchasing or possibly raising coverage on life insurance policies is critical for both parents. There is a dependent on the way who needs to be cared for and a spouse who needs the security of added coverage should the unthinkable happen.
  5. Updating Account Ownership and Beneficiary Designations
    -Proper beneficiaries will ensure that assets are assigned according to the documents you have prepared.

The cost for preparation of these documents pales in comparison to the comfort of knowing that your loved ones are protected and well cared for.  These safeguards are essential for the care of your new family.

Approximate costs of estate planning range from $1500 – over $4,000. However, the cost of probate court fees and attorneys easily surpass $20,000. It’s a no-brainer to plan ahead and properly plan your estate before the need ever arises.

Maternity/Paternity Leave

Another important factor to consider is time off from work-  maternity/paternity leave.  The FMLA or Family and Medical Leave Act is a federal lw requiring employers to provide at least 12 weeks of unpaid leave for expecting mothers and fathers. This law guarantees you will have a job to return to but does not guarantee that you will have an income during your time off.

During your pregnancy, reach out to your Human Resources department for help in determining company policies regarding paid time off and FMLA leave. Some employers may not fall under the FMLA requirements yet others may even offer a form of short term disability or other forms of paid leave for expectant parents.

Like everything else, it pays to ask and perform due diligence in finding out exactly what benefits are going to be available to you.

Periods of lost or reduced income are costs that no family wishes to face unexpectedly.

So having this information early can help you prepare and start saving, if necessary.

Increased Expenses

As your family gets larger, it seems other things in your life need to grow as well.  It’s not unreasonable to include the cost of larger living spaces or perhaps a bigger vehicle, in the cost of pregnancy.

A one-bedroom apartment or a two-seater sports car, just aren’t practical for family life.  So

depending on your situation, it may be time to make some lifestyle changes before Baby arrives.

Believe it or not, that tiny little bundle needs space (a lot of space) for all of their stuff. However, don’t let the fact that you are going to have a baby destroy your financial planning. Before making larger purchases, consider how those purchases are going to affect your future finances and well-being of your family. Frequently splurging on expensive items and neglecting your financial plan (such as saving and investing) is not the best way to provide a great life for your family.


According to Baby and their baby-cost-calculator, it costs approximately $8000-$15,000+ for infant care in the first year.

This number is for a stay at home parent, with a breastfed baby, who is purchasing disposable diapers. This number also includes a pretty comprehensive list of the one-time costs of infant items such as cribs, clothing, and strollers.

The handy calculator

allows you to calculate different variables such as daycare vs. nanny, and diaper service vs. disposables, which helps to personalize the cost and causes it to vary widely.

Technically, baby care is a cost that would be incurred in the infant’s first year.  Since most of these decisions and purchases need to be in place before the baby arrives, they really should be considered a cost of pregnancy.

Recent studies demonstrate that over the course of 18 years, costs for raising one child are approximately $235,000.


We also have to consider mom’s needs and specifically, her wardrobe.  Maternity clothes are a must for keeping mom feeling and looking her best. The cost will vary depending on mom’s career, needs, and preferences, but she’s probably going to need to spend a fair amount of money on clothes and shoes.

Pregnancy yoga, pregnancy massage, pregnancy chiropractors, doulas, etc. may also be essential costs for Mom’s well being. This is in addition to all of the necessary, and sometimes unplanned, prenatal and pregnancy costs.

These costs may be considered elective and not covered under health insurance but may qualify for FSA/HSA expenditures.


Increased Expenses means it’s time to examine your budget.

Aside from one time costs for Baby, and mom’s pregnancy essentials, your monthly expenses are also going to increase.  During pregnancy, start to investigate these costs and develop a plan.

Some questions to ask:

  • Has our rent/mortgage increased?
  • What is the cost of Childcare?
  • How much college savings should we be investing?
  • How much do we expect our food budget to increase?
  • Will our insurance premiums change?
  • What items are considered “eligible expenses” for HSA and FSA accounts?

With some forethought, you and your partner can have a reasonable budget in place before Baby comes home from the hospital.

There are going to be many surprises in those first few months— finding out you have “more month than money” doesn’t need to be among them.

A note on eligible expenses for HSA/FSA accounts: the list is far too long to include here and there are probably expenses that you may find surprising. Ask your insurance company for a eligible cost lists or perform a simple internet search.


During pregnancy, It may be worth your while to schedule an appointment with your tax advisor to discuss the tax consequences of having a baby.

Here are some things to consider

  • Updating your W-4 at work
    • Adding a dependent to your deductions could result in increased take-home pay
    • However, consider how your tax burden may change come April
  • Obtaining a Social Security Number for your child
    • In order to claim your child as a dependent on your taxes, you will need to register them for a SSN#. This can be done before you leave the hospital when you are filling out your child’s birth certificate
  • Learn about tax credits and deductions
    • For 2018 and 2019, the tax credit for a new baby is up to $2000 per qualifying child
    • Up to $1,400 of the tax credit is refundable
    • You may also be eligible for earned income credits, childcare credits, adoption credits, college savings benefits
    • To be clear, a child entitles the parents to both tax deductions and tax credits. Both reduce your tax burden, but in different ways
  • Do you have a nanny?
    • You are the nanny’s employer and must report this on your tax documents
  • Does your child have income from investments?
    • You will have to report this on your tax forms
    • Known as the “kiddie tax”


Qualifying for the Child Tax Credit

The child can be your child from birth, adoption, a foster child, or even a step-child.

Your income level is capped at $200,000 if single and $400,000 if married filing jointly.

The child must be under 16 years of age prior to December 31st of the year the credit is being solicited

Childcare Credit

The government may give you up to a 35% dollar-for-dollar credit, up to $3,000 for childcare costs. The credit is scaled according to the parent’s income.

Check with your financial planner and/or tax specialist to determine how much of credit you may be eligible for. In addition to the federal credit, some states also offer a childcare credit.

Adoption Tax Credit

Yes, there is a credit for that!

For 2019, the federal adoption tax credit is $14,080, which is scaled according to income.

If your modified  adjusted gross income is:

  • Less than $211,160, you are eligible for the full credit
  • More than $211,160 but less than $251,160, you are eligible for a reduced credit
  • More than $251,160, you are not eligible for the credit

Savings & Investments

Planning for a baby is planning for the future. As mentioned above, be careful to not completely disregard your saving and investing plans. One of the best ways to protect your family is to plan for their financial future.

Pregnancy is an ideal time to re-evaluate your portfolio. Are your investments too risky?  Too conservative?  Is it time to change contribution amounts?

You will certainly need to continue saving and investing for your retirement.  But the future holds many things for your new family-  college, braces, cars…

A  financial advisor can help develop a plan that’s right for you.  They will also be able to advise you on savings strategies and products for minors.

Here are some to Explore:

  1. Open a savings account
  2. Open a Roth IRA
  3. Look into 529 college plans
  4. Opt for a Coverdell education savings account
  5. Consider prepaid tuition plans
  6. Open a Uniform Gifts to Minors Act or UTMA account
  7. Set up a Trust for education
  8. Invest in treasury bonds


A quick overview of some of the lesser-known saving options


529 College Plan

This a a tax-advantaged savings arrangement that allows parents to save for future college costs. There are two types of 529 plans, according to the U.S. Securities and Exchange Commission:

  • Pre-paid tuition plan
  • Educations savings plan

The pre-paid plan allows you to purchase college credits at current prices for your child. Considering the alarming rate at which college tuition is increasing, this may be an attractive plan.

The education savings plan allows you to open an investment account focused on growth in the child’s early years and then shifts to a more conservative portfolio as the child nears college age.

A 529 plan can receive contributions and “gifts”

States set contribution limits. Washington state allows for contributions up to $500,000


This account type offers a way for minors to own securities and eliminates the need to hire an attorney for the preparation of trust documents.

The parents act as fiduciaries, and must follow fiduciary standards and the money in the account is part of the parents’ taxable estate. Any income that is generated from this account is subject to the “kiddie tax” and therefore must be reported on your tax documents.

Coverdell Account

This account type is an after-tax savings account, similar to a Roth. Withdrawals made on this account are tax-free.

The yearly contribution limit is currently $2,000

There are several nuances to all of these saving vehicles so reach out to your financial advisor to see what will be best for you and to establish a plan that allows you to maximize savings.

With careful planning, you can start your family off on the right financial path. Schedule appointments during your pregnancy with the tax, law and financial professionals on your Team.

Then when the baby comes you can focus on the truly important thing, your family.

After all, An addition to the family may come with added costs but also added joy and being a parent will make your life richer in ways you never thought possible.

As always, don’t try to navigate all of these difficult concepts on your own. Make an appointment with your financial advisor and tax specialist early on if you are trying to have kids or know that you are pregnant.


Company Stock Compensation Plans: How They Work and How to Use For Retirement Savings

Company stock compensation plans are a big deal and are often offered to employees at some of the most iconic employers that have ever existed. If you are eligible for employee stock compensation congratulations. But there is a lot to learn about these different plans. Regardless of the exact type of plan that you are eligible for, you will want to learn about the basic workings of the plan, the rules and regulations, how your tax burden will change, and how you can use these tools to plan for your retirement.

This article offers several over-simplified examples of different compensation plans. Therefore, the smartest thing you can do is to have an individualized meeting with a financial professional to discuss your full range of options so that you can have the best financial future possible. Educate yourself using reliable resources such as professional financial planners and tax experts. What your co-workers say at work may or may not be true as several misconceptions have arisen surrounding stock compensation plans.

Employee Stock Options

Employee Stock Options (ESO) are a form of company compensation where the employee is given the option of when to sell stocks. “Exercising” your stock option occurs if and when you buy the stocks that are offered to you. If done right, ESOs can offer opportunities for large financial gains.

Important things to know about ESOs:

  • ESOs allow employees to share in the growth and success of a company but without personal financial risk to the employee (until the stock option is exercised)
  • The stock value is hypothetical until the option is exercised
  • They serve as both a reward and as a motivator – Hard work will benefit the company and company growth will raise the value of company stock which will benefit the employee financially
  • The type of stock option determines its tax treatment

As an employee with an ESO, you will want to know the basics about the stock options available to you, when your stock options will be vested, how and when your options will be taxed, as well as some of the strategies and risks with regards to exercising your stock options.

 How ESOs work:

Your employer will offer you the chance to buy company stock at a specified time, depending on the employer’s vesting plan. But, realize that the stock option won’t be available indefinitely since there is an expiration date included in the plan.

There are 2 types of ESOs

  • Non-Qualified Stock Options (NQSO)
  • Incentive Stock Options (ISO)

How do vesting schedules work?

ESOs are subject to a vesting schedule. When you begin working with a company, you most likely will have to wait a period of time in order to have all or a percentage of your stock options become available to you (i.e. vested). A vesting schedule is another method that employers use to retain employees; the longer the employee stays with the company, the greater the financial gain. Once a compensation form is vested, the employee has a legal right to claim that compensation.

A graded vesting schedule may occur as follows (companies use varying schedules):

Time Employed Percent of ESO Vested
1 Month 2%
2 Months 4%
3 Months… 6%…
…23 Months 98%
24 Months 100%

A cliff vesting schedule is, well, like going off a cliff. It’s a sudden change in the percent vested.

Time Employed Percent Vested
1 Year 0%
2 Years 100%

Companies may also decide to blend the vesting schedule. For example, a company may use a graded scale, but with a 1-year cliff to start. If the employee were to leave the company prior to completing the first year, he or she would not have the right to any part of the stock. Vesting schedules vary so check with your employer to learn about your schedule. It is important to know when your compensation will be vested so that you can make correct decisions.

To compare, companies that offer 401(k) accounts with employer matches, for example, also typically use a vesting schedule. The employer match might become gradually vested at 20% per year, or they may use a cliff schedule of 100% vested status after three years of employment. If the employee changes jobs prior to the time at which the employer match is vested, he or she has no right to that match money. But, once vested, that matched money belongs to the employee.

Once the predetermined amount of stock is vested, you will be offered stock at the grant price. If you decide to exercise your options, you must do so prior to the expiration date.


Let’s say that your employer offers you the right to purchase 1,000 shares of company stock at $10.00 per share (the grant/strike price) once vested. Let’s imagine that your company’s stock is valued at $20 on the grant date. Alternatively, you could be granted a percentage of stock, let’s say 25%, per year over 4 years, at which point you would be fully vested.

Your option would look like this:

The fixed grant price is $10.00/share in the grant year of 2020.

Market price at grant date: $10.00/share

Expiration date: 2030

Exercise date: June 1, 2025.

Market price on exercise date: $30.00/share

If you decide to exercise your stock options, which you can perform on June 1, 2025, you will buy the 1,000 shares for a total of $10,000. If you don’t exercise your options prior to year 2030, you will lose your stock options. Imagine that the market price on the grant date was $15.00 (or $25, or 50, etc.), and the company has been seeing increasing stock prices for several years. These factors may influence you on when exactly you decide to exercise your options.

The question for many then becomes: When should I exercise my stock options?

The best answer is to speak with your fiduciary financial planner and tax expert. However, the decision to exercise should be based on a combination of:

  • Tax rates
    • Consider ordinary income tax, alternative minimum tax, and long-term capital gains tax
  • Type of stock option (ISO vs. NQSO)
  • Years until retirement
  • Stock prices
    • Are your stocks “underwater/out-of-the-money” or “in-the-money?”
    • Under-the-water represents devalued stocks whereas in-the-money represents stocks that have increased in value


What’s the benefit of ESOs?

ESO compensation allows you to purchase stock at a price that theoretically should be below the market value of a share. ESOs are therefore more valuable than buying exchange-traded funds, which are priced above the grant price of ESOs. ESOs give you more flexibility and bang for your buck. However, if you allocate too much of your portfolio to your company’s stocks, you risk being highly vulnerable if those stocks decrease in value.

Taxation of ESOs

Nonqualified Stock Options:

As the name implies, non-qualified stock options are not eligible for any form of special tax treatment.

When you exercise a NQSO, the spread (the difference between the grant price and the market price of a stock) is considered earned income and you will, therefore, be subject to:

  • Payroll taxes
    • Social Security and Medicare Tax
  • Ordinary taxes
    • At your particular tax bracket rate
  • Capital gains tax on any appreciation of stock, or take a capital loss in the case of decreased stock value

Incentive Stock Options:

The ISO is taxed differently than nonqualified stock options. With ISOs, you will not be subject to payroll taxes, and other taxes will depend on exactly how you exercise your options. If you exercise your stock option but also sell your stock in the same calendar year, you will pay your ordinary tax rate on the spread of the stock.

If you exercise your options but hold the stock for one year past the exercise date, the spread amount will be used for Alternative Minimum Tax (AMT) calculation, which you may have to pay. However, by holding the stock for one year after exercising your option, you can avoid paying ordinary tax and instead pay a long-term gains tax, which is lower than the ordinary tax, especially for high-income earners.

However, don’t let any one particular tax rule, or the fear of paying certain taxes, be the ultimate decision-maker for deciding what to do with your options. Having too large of a percentage of your portfolio allocated to just one company can also be risky. Consider what would happen to your portfolio if your company stock falls dramatically, even below the grant price.  Again, it is wise to speak to tax and financial professionals before making any decisions.

How can I use ESOs for retirement planning?

Use the profit to:

  • Diversify your existing portfolio
  • Pay down debt
  • Build up an emergency fund
  • Use the earnings to build a strategy that allows you to max out retirement accounts
    • Note that you can only fund a Roth and a Traditional IRA with cash and you can only use salary deferrals to fund employer-sponsored retirement plans, like a 401(k)
    • You can’t exchange options into retirement accounts
  • Convert a Traditional IRA to a Roth IRA using the stock profit to pay the applicable taxes. This may make sense depending on the tax bracket you think you will belong to in retirement and/or depending on your eligibility (income limits apply) to contribute to a Roth IRA

Restricted  Stock Units- RSUs

RSUs are another form of compensation that companies use to recruit and retain solid employees. RSUs may be distributed to employees based on a vesting schedule or when certain milestones or achievements are met. The following are key elements to RSUs:

  • Once vested RSUs are assigned a fair market value
  • Are tax-deferred, until vested
  • Dividends, if offered, appear on a yearly W-2 form
  • Are less risky than stock options (ESOs are subject to more volatility)
  • Don’t confer voters’ rights until vested (no rights at all if cash given in lieu of stocks)

Typically, RSUs may be distributed as follows:

The employee is offered 1,000 RSUs that are vested at 25% (250 RSUs) each year and the grant price is $10 per unit. Let’s imagine that the market value of the stock increases $5 each year.

Year 1: 250 at $10 = $2,500

Year 2: 250 at $15 = $3,750

Year 3: 250 at $20 = $5,000

Year 4: 250 at $25 = $6,250

At the end of the 4 years, the employee has a total of $17,500 in RSUs. Notice that there is no strike price (grant price) with RSUs like there is with stock options. Consider what would happen in the case that your company’s stock, which was granted to you at a grant price of $10.00/share, fell to a value of $5.00/share? In this case, you could not sell for a profit, you are under-the-water.

What if the same situation occurs with RSUs and the value of your company’s stock falls? Well, since there is no strike price, you are not buying the stock at any predetermined value, so even if market value falls, with RSUs you are still going to get some benefit, known as “downside protection.”

Of course, companies will not grant as many shares via RSUs as they would in stock options. Bill Gates recognized that stock options were akin to playing the lottery because if you win, you win big. Imagine how big you could win if a company’s stock increase by 50%? However, stock options can be very volatile and employees may not win at all. RSUs stabilize the playing field and is why they were introduced to Microsoft employees.

Taxation of RSUs

RSUs are taxed once they are vested and distributed to the employee and taxed at the market value at the time they are vested. That is different than how stock options are taxed. To be clear, RSUs are taxed once vested, unlike stock options that are taxed once exercised.

RSUs are subject to:

  • Federal income tax
  • Payroll taxes (Social Security- up to yearly maximum benefit base, & Medicare)
  • Applicable state and local taxes
  • Capital gains tax with stock appreciation
  • Section 83(b) is only for restricted stock, not RSUs

A fairly common practice among companies is to reach a “net-settlement” and essentially ‘pay’ the applicable payroll tax amount:

  • RSUs are distributed to the employee
  • The amount in taxes is calculated, and the corresponding value in RSUs is withheld and returned to the issuing company
  • Withheld value is used to cover payroll taxes

Of course, like with ESOs, employees want to know if they should hold or sell their RSUs and common misperceptions surround this issue. Many media outlets have reported on RSU recipients that decide to hold RSUs because of a perceived tax benefit of paying long-term tax rates instead of the more pricey short-term capital gains tax. Additionally, people often fall into the trap of endearment, thinking that their company will always do well and by holding onto company stocks, the shareholders will, with patience, get very rich. History is littered with companies that once were giants but eventually fell.

For most people, the correct decision would be to sell the RSUs and use the cash to reinvest in a more diversified portfolio. Remember, having too much money allocated to any one company can reduce diversification, and increase ‘concentration risk.’ In other words, by holding the RSUs you are unnecessarily increasing your risk.  Also, consider the possibility of your shares decreasing in value. If this happens, you will have paid taxes on the larger original value (at the time of vesting) plus now you have lost value on the shares, a double-whammy.

However, the year that your RSUs vest, your taxable income is going to bubble. Take advantage of the help of a tax professional and financial planner and perform a big-picture evaluation of your particular financial situation. There may be benefits in terms of capital gains and additional Medicare tax rates by holding onto the RSUs.

How can I use RSUs to plan for retirement?

  • Use RSUs to beef up an emergency fund
  • Use the cash to max out retirement accounts, as applicable and decrease the concentration of investments aiming to diversify
  • Sell most RSUs, but hold on to some. If the stock increases in value, sell some more. If the stock is devalued, you won’t take as big of a hit.

Employee Stock Purchase Plans (ESPP)

ESPPs are a compensation plan that employers use to offer eligible employees the opportunity to buy company stock at a reduced rate. Once eligible, the employee will begin to make contributions, usually as payroll deductions, toward the plan. After a predetermined period of time, the company will use the accumulated contributions to buy the employee company stock at a reduced rate.

There are two types of ESPP

  • Qualified ESPP
  • Non-qualified ESPP

The basic workings of both types of ESPPs are very similar. Major differences include favorable tax treatment for qualified ESPPs whereas non-qualified plans don’t enjoy the same tax advantages. Qualified plans are more common, and that’s what we will focus on here.

Key ESPP elements include:

  • Yearly contribution limit of $25,000 (thus, purchased stock is limited to $25,000 worth of shares)
    • This is a fixed amount that won’t change for the year, even if stock prices fluctuate
    • Actual shares purchased may be below this limit
  • Contributions are after-tax
  • No taxes on stocks until they are sold
  • 15% maximum discount on stocks
  • Employees that own more than 5% of employee stock can’t participate
  • Stock is purchased during offering periods
  • Funds used to purchase stocks are immediately vested
  • Discounted stock
    • Built-in discount
    • ‘Look-back’ provision

The  ‘look-back’ provision allows the ESPP to provide the employee with the lowest of:

  • The closing stock price on the date of the purchase
  • The closing stock price on the original offering date

The plan may offer both the ‘look-back’ benefit plus a discount on that ‘look-back’ price, offering a tremendously discounted stock price. However, factors that cause the stock price to decrease can also devalue the ESPP and effectively limit the amount of stock purchased, even to an amount below the allowed $25,000 so it can go both ways.

Taxation of ESPPs

With ESPPs, there are two ways to sell the stock, each having an effect on tax treatment:

  1. A qualified disposition (more favorable tax treatment)
  2. A non-qualified disposition

What makes a sale a qualifying disposition?

The stock must have been held for at least 2 years since the offering date, and 1 year since the purchase date.

If these qualifications are not met, the sale is categorized as non-qualifying.

Qualified Disposition Taxation

Under a qualified disposition, the discount on the stock purchase is taxed as ordinary income and the gain will be taxed with long-term gain rates.

In a non-qualified disposition, both the discount and capital gain on the stock will be taxed at the ordinary tax rate, increasing the amount of taxes paid.

If you purchased a $500 stock at a 15% discount for a total of $425, and the difference in the price from the purchase date (including the discount) and the price on the sale date is $200, then you would:

  • With a non-qualified disposition, pay an ordinary tax (at 33% of $200) of $66
  • With a qualified disposition, pay an ordinary tax on the discount of $75 (33% of $75) = $24.75 and a long-term gain tax at 15% of $200, which = $30.
    • $30 + $24.75 =$54.75

You can see that if an employee owned more stock, more like thousands of dollars of stock, the differences in taxes would also be greatly magnified. As a word of caution though, don’t let this fact influence you too much when deciding to sell or hold your stocks.

Employers usually report ESPP purchases and gains on a W2 form. If yours does not do this, you must file Form 1040.

By this point, you are probably wondering if you should hold onto or sell your ESPP stock?

Like with the other stock compensation options, it’s always going to depend. You have to evaluate your individual financial circumstances with the help of a financial planner.

It bears repeating that holding too much stock in one company, especially your company and the company that pays your wages, decreases diversification and exposes you to more risk. If something economically goes wrong at your company and the stocks plummet while the company decides to lay you off, you could really suffer. It’s impossible to know what is going to happen to the value of any one company’s stocks over time. You may have lots of confidence in your employer, or you may have none. This is also going to affect your decision.

By having received shares at a discounted price, you are already getting that 15% discount. In other words, that’s a positive return on investment. Holding onto the shares in order to satisfy qualified disposition criteria may work out, and it may not. Again, talk to professionals. Don’t let taxes be the sole reason to sell or to hold. However, in this case, selling is probably a safe move.

How Can ESPPs Help Me Plan For Retirement?

  • Sell shares and further diversify your portfolio
  • Contributions are after-tax, don’t spread yourself too thin

Wealth management is our passion! Let us help you make the best decisions today so that you have the best future possible. Contact us now to schedule a time to discuss your financial questions.


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