By Greg Hart, CFP®
Having a long, successful career as a corporate executive is a great accomplishment. You’ve climbed the ladder, worked hard to get where you are, and you devote much of your time and energy to improving your company’s bottom line. That often means that aspects of your personal life can be neglected, including your financial planning. Every career brings its own set of challenges, and understanding those challenges is the first step to overcoming them. Here are four financial planning obstacles you are probably facing and some ideas on how to conquer them.
1. Effectively Saving For Retirement
You may be busy running a company now, but eventually you will want to slow down and savor your golden years. Are you planning ahead now so that one day you can afford the retirement lifestyle you want? Your options may be limited due to the level of pay you receive. In addition to contributing the maximum amounts to your 401(k) and IRA, here is one idea that might help you save even more for your retirement nest egg.
“Backdoor” Roth Conversions
The 2021 Roth income limit level is between $125,000 and $140,000 for taxpayers filing as single; and between $198,000 and $208,000 for those married filing jointly. (1) If you fall below the lower number threshold, you can contribute up to the contribution limit; and if you fall between the two limits, you can contribute a reduced amount. Anything above that, and you are not eligible to contribute. But you aren’t out of luck.
One way to save more for retirement is via making nondeductible contributions to a traditional IRA and then converting those funds to a Roth IRA. And everyone is eligible to make nondeductible contributions to traditional IRAs. So, this “backdoor” Roth strategy is simply putting your money into a nondeductible traditional IRA and subsequently converting it into a Roth account. This is the “post-tax” way to make it happen. There are also ways to convert pre-tax savings to a ROTH but that involves paying taxes. So you need to be careful. While it sounds fairly simple and straightforward, if you have other traditional pre-tax IRA accounts, it can get complicated. You see, the IRS takes into consideration all pretax holdings when figuring the tax liability of a conversion. So, if you have $20,000 in pre-tax contributions and $5,000 in nondeductible contributions in your IRA, you may have to pay tax on 80% of your conversion, since that is the percentage of your total account that has yet to be taxed.
A backdoor Roth is a great way for high-income earners like corporate executives to gain access to the great benefits of a Roth IRA, which includes tax-free withdrawals and no required minimum distributions (RMDs). However, because of the tax implications, you need to be careful. It’s important to work with an experienced financial advisor or competent CPA when doing a Roth conversion to cover your bases and make the best decisions for your unique situation.
2. Creating A Diversified Portfolio
Even if your company has a track record of success, it can be risky to have the bulk of your financial future tied up in the business. Consider this: as an employee, you are already investing in your company. You believe in its success and security, which is why you work there. You might also contribute to your company 401(k) plan, which is another investment in your company via company stock. But if most of the stock you own is in the company, you could be putting all your eggs in one basket. If the company went under or suffered a major setback, you could lose your income, your benefits, and your portfolio could take a major dip.
Working with a professional, you can evaluate your portfolio’s current lineup and whether it needs to be rebalanced or diversified. Be sure to partner with someone experienced in employee stock options. There are certain rules, such as insider trading policies and SEC regulations, that may apply to your situation and affect your decisions.
3. Tax Planning
As a corporate executive, you are likely highly compensated. While this is a reward of your dedication to your company, it can create tax headaches. The more you make, the more you’re taxed, unless you employ tailored tax strategies to maximize the money you take home. Your goals are to maximize tax deductions, minimize your taxes both now and in retirement, and have a tax-efficient investment and estate plan in place. You also need to consider the tax implications of your company stock. Taxes are the last thing most busy executives want to delve into, so that’s where an experienced financial advisor can help you most effectively plan around the tax code.
4. Not Knowing Where To Turn
Let us help you carry the burden of financial planning so you can do what you do best, successfully run your company. You face unique financial planning challenges, but you don’t need to be overwhelmed and intimidated by them. At Haddon Wealth Management, we have the experience and expertise to walk you through each aspect of your retirement planning and help you thoroughly prepare for your future.
Whether you need to get started on your retirement planning or have questions about strategies that may work for you, call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.