Retirement Income Planning

What Should I Do With My Old 401k Plan?

Contributed by: Josh Bitel Josh Bitel

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If you have recently retired or changed jobs, you may be wondering what will happen to the 401k you’ve been diligently contributing to over the years.  As with almost every financial decision, there is no “one size fits all” answer, it truly will depend on your own unique goals and desire to receive professional guidance on the account.  In most cases, however, there are three options that you will want to consider:

Leaving your 401k where it is

  • Limited investment options
    • Especially in bonds/fixed income
    • 401k plans can be great for accumulating but when one is in distribution mode, in many cases, having access to a wider array of investment options is preferred
  • Creditor protection
    • 401k plans can offer additional protection compared to IRAs in certain circumstances
  • Self-directed in most cases aka you’re responsible for managing the account
    • In many cases, your 401k is your largest financial asset that will be used to support your retirement lifestyle; you should evaluate if you have the time and knowledge to adequately manage the account

*If you are changing jobs, some 401k plans offer you the ability to roll an old plan into your new one for consolidation.

  • Some additional flexibility on distributions
    • As long as you are over age 55 and no longer working, or over 59 ½ regardless of employment status, you can avoid the additional penalty on this distribution.

Rolling your 401k to an IRA

  • Access to a wider range of investment options
    • In many cases will allow you to better diversify your account and potentially reduce the overall risk level of your portfolio 
  • Professional management
    • Investing funds within an IRA will allow a financial advisor to actively manage and provide advice on your account
    • Our processes at The Center allow us to review your individual investments and accounts every single day to see if changes are warranted
    • Good option for those who would prefer to delegate the financial matters in their life 
  • Taxes
    • When rolling funds from a 401k to an IRA, it is typically recommended that you process the transfer as a direct rollover – this will make sure the transfer will not be a taxable event

Lump-sum distribution

  • Taxable event
    • Simply put, this is a full liquidation of the account which will result in a taxable event
      • Could pay upwards of 40% in tax between federal and state and possibly a 10% penalty if funds are withdrawn before age 55
    • In most cases will push you into a higher bracket
  • Bottom line, typically not recommended
    • In most cases, due to the severity of the tax implications, we would not recommend a total lump-sum distribution of funds
      • As always, be sure to consult your tax adviser when making decisions on large retirement plan distributions

Determining what to do with your old 401k plan is an important financial decision you won’t want to take lightly.  I can’t tell you how many times we have seen new clients come to us who left their employer years ago and the overall investment allocation of the 401k plan they still have is nowhere close to where it should be given their stage in life and other financial goals.  Please let us know how we can be a resource for you or those you care about when faced with the question, “what should I do with my old 401k plan?”

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®


The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Josh Bitel and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.  For additional information and what is suitable for your particular situation, please consult us.

Is My Pension Subject to Michigan Income Tax?

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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It’s hard to believe, but it’s been nearly seven years since Governor Snyder signed his budget balancing plan into law in 2011, which became effective January 1, 2012.  As a result, Michigan joined the majority of states in the country in taxing pension and retirement account income (401k, 403b, IRA, distributions) at the state income tax rate of 4.25%. 

As a refresher, here are the different age categories that will determine the taxability of your pension:

1)     IF YOU WERE BORN BEFORE 1946:

  • Benefits are exempt from Michigan state tax up to $50,509 if filing single, or $101,019 if married filing jointly.

2)     IF YOU WERE BORN BETWEEN 1946 AND 1952:

  • Benefits are exempt from Michigan state tax up to $20,000 if filing single, or $40,000 if married filing jointly.

3)     IF YOU WERE BORN AFTER 1952:

  • Benefits are fully taxable in Michigan.

What happens when spouses have birth years in different age categories?  Great question!  The state has offered favorable treatment in this situation and uses the oldest spouse’s birthdate to determine the applicable age category.  For example, if Mark (age 65, born in 1953) and Tina (age 70, born in 1948) have combined pension and IRA income of $60,000, only $20,000 of it will be subject to Michigan state income tax ($60,000 – $40,000).  Tina’s birth year of 1948 is used to determine the applicable exemption amount – in this case, $40,000 because they file their taxes jointly. 

While this taxing benefits law angered many, I do think it’s important to note that it’s a very common practice for states to impose a tax on retirement income.  Believe it or not, only nine states do NOT tax pensions and retirement account distributions – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.  Also, Michigan is 1 of 37 states that still does not tax Social Security benefits. 

Here is a neat look at how the various states across the country match up against one another when it comes to the various forms of taxation:

 Source:  www.michigan.gov/taxes

Source:  www.michigan.gov/taxes

Taxes, both federal and state, play a major role in one’s overall retirement income planning strategy.  Often, there are strategies that could potentially reduce your overall tax bill by being intentional on how you draw income once retired.  If you’d ever like to dig into your situation to see if there are planning opportunities you should be taking advantage of, please reach out to us for guidance. 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.


The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to  be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The above is a hypothetical example for illustration purposes only.

Explaining the What is the “Restore” Option for Pensions, Part 3 of a 3 Part Series on Pensions

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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Selecting your pension benefit option as you near retirement could quite possibly be the largest financial decision you ever make.  If you’ve received a breakdown of the various ways you can elect to have your pension benefits paid and you’re feeling overwhelmed, you are certainly not alone!  In many cases, employers give you the option to select from upwards of 30 different options that have various survivor benefits, lump-sum payouts, Social Security bridge payments and more.  Is your head spinning yet? 

One of the more appealing pension options that our team is seeing more and more of is the “restore” option.  The restore feature of a pension is a way to protect the person receiving the pension if their spouse dies before them.  If that were the case, the restore option allows the retiree to “step-up” to the higher single/straight life payment.  Similar to the survivor benefit, the restore option is another layer of “insurance” to protect the retiree from being locked into a permanently reduced pension benefit if their spouse pre-deceases them. 

Let’s take a look at an example of the restore feature:

Tom (age 61) is retiring from XYZ Company in several months.  Tom would like to evaluate his pension options to see which payment would be best for him and his wife Judy (age 60).  Tom has narrowed it down to 3 options:

Option 1:

  • $45,000/yr single/straight life (no survivor benefit)
    • Payment would cease upon Tom’s passing – $0 to Judy

Option 2:

  • $41,000/yr 50% survivor option
    • Judy would receive a $20,500/yr benefit during her lifetime if Tom pre-deceases her

 Option 3:

  • $40,200/yr 50% survivor option with “restore” feature
    •  Judy would receive a $20,500/yr benefit during her lifetime if Tom pre-deceases her
    • Tom would step-up to a $45,000/yr benefit (straight/single life benefit figure) if Judy pre-deceases him

The more Tom and Judy have discussed their overall financial plan; they are not comfortable selecting the single/straight life option and risking Judy not receiving a continuation of benefits if Tom pre-deceases her.  However, because Judy has had some health issues in the past, they feel the 50% restore payment option makes more sense for their situation because it is very possible that Judy will die before Tom.  They are comfortable with an $800/yr reduction in payment to have the “insurance” of Tom stepping up to the higher single/straight life option if he survives Judy. 

While the restore option for Tom and Judy seems to make perfect sense, there truly is no a “one size fits all” pension option that works for everyone.  Every situation is very unique and it’s important that you evaluate your entire financial picture and other sources of retirement income to determine which pension option is right for you and your family.

Click to see part 1 of pension blogs How to Choose a Survivor Benefit for Your Pension and part 2 What You Need to Know About Pension Benefit Guaranty Corporation or PBGC

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.


The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP© and not necessarily those of Raymond James. This is a hypothetical example for illustration purpose only and does not represent an actual investment. This is a hypothetical example for illustration purpose only and does not represent an actual investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

WEBINAR IN REVIEW: Retirement Income Planning: How Will You Get Paid in Retirement?

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

One of most common questions I hear from clients as they approach retirement is, “How do I actually get paid when I’m no longer working?” It’s a question that I feel we as planners can sometimes take for granted.  Because we are helping hundreds of clients throughout the year with their retirement income strategy, we can sometimes forget that this simple question is often the cause of many sleepless nights for soon-to-be retirees.   

Saving money throughout your career can be simple, but certainly not easy. Prudent and consistent saving requires a tremendous amount of discipline. However, if you elect the proper asset allocation in your 401k and you’re a quality saver, in most cases, accumulating really doesn’t have to be all that difficult.  However, when it comes time to take money out of the various accounts you’ve accumulated over time or have to make monumental financial decisions surrounding items such as Social Security or which pension option to elect, the conversation changes. In many cases, this is a stage in life where we frequently see those who have been “do it yourselfers” reach out to us for professional guidance. 

The first step in crafting a retirement income strategy is having a firm grip on your own personal spending goal in retirement. From there, we’ll sit down together and evaluate the fixed income sources that you have at your disposal. Most often these sources include your pension, Social Security, annuity income or even part-time employment income. Once we have a better sense of the fixed payments you’ll be receiving throughout the year, we’ll take a look at the various investable assets you’ve accumulated to determine where the “gap” needs to be filled from an income standpoint and determine if that figure is reasonable considering your own projected retirement time horizon. Finally, we need to dive into the tax ramifications of your income sources and portfolio income. If you have multiple investment or retirement accounts, it’s critical to evaluate the tax ramifications each account possesses. 

Make sure you listen to the replay of our webinar “Retirement Income Planning: How Much Will You Get Paid In Retirement?” for additional tips and information on how you might consider structuring your own tax-efficient retirement income strategy.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.


The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. You should discuss any tax or legal matters with the appropriate professional.

What You Need to Know About Pension Benefit Guaranty Corporation or PBGC, Part 2 of a 3 Part Series on Pensions

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

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In many cases, the decision you make surrounding your pension could be the largest financial choice you’ll make in your entire life.  As such, the potential risk of your pension plan should be on your radar and factored in when ultimately deciding which payment option to elect.  This is where the Pension Benefit Guaranty Corporation comes into play.

The Pension Benefit Guaranty Corporation or “PBGC” is an independent agency that was established by the Employee Retirement Income Security Act (ERISA) of 1974 to give pension participants in plans covered by the PBGC guaranteed “basic” benefits in the event their employer-sponsored defined benefit plans becomes insolvent.  Today, the PBGC protects the retirement incomes of nearly 40 million American workers in nearly 24,000 private-sector pension plans. 

Municipalities, unions and public sector professions are almost never covered by the PBGC.  Private companies, especially larger ones, are usually covered (click here to see if your company plan is).  Each year, companies pay insurance premiums to the PBGC to protect retirees.  Think of the PBCG essentially as FDIC insurance for pensions.  Similar to FDIC coverage ($250,000) that banks offer, there are limits on how much the PBCG will cover if a pension plan fails.  It's important to note that in most cases, the age you happen to be when your company’s pension fails is the age the PBGC uses to determine your protected monthly benefit. 

For example, if you start receiving a pension at age 60 from XYZ company and 5 years later, XYZ goes under when you’re 65, your protected monthly benefit with the PBGC would be $5,2420.45 – assuming you are receiving a straight life payment (see table below).  As we would expect, the older you are, the higher the protected monthly benefit will be due to life expectancy assumptions.    

 *chart is from Pension Benefit Guaranty Corporation website

*chart is from Pension Benefit Guaranty Corporation website

When advising you on which pension option to choose, one of the first things we'll want to work together to determine is whether or not your pension is covered by the PBGC.  If your pension is covered, this is a wonderful protection for your retirement income if the unexpected occurs and the company you worked for ends up failing.  If you think it will never happen, let’s not forget 2009 when many unexpected things occurred in the world such as General Motors filing for bankruptcy and Ford nearly doing the same.  If your pension is not covered, we'll want to take this risk into consideration when comparing the monthly income stream options to a lump sum rollover option (if offered). 

While PBCG coverage is one very important element when evaluating a pension, we’ll also want to analyze other aspects of your pension as well, such as the pension’s internal rate of return or "hurdle rate" and various survivor options offered. 

As mentioned previously, the decision surrounding your pension could quite possibly be the largest financial decision you ever make.  When making a financial decision of such magnitude, we’d strongly recommend consulting with a professional to ensure you’re making the best decision possible for your own unique situation.  Let us know if we can help!   

Be sure to check out our pension part 1 blog How to Choose a Survivor Benefit for Your Pension posted April 5th and our next blog Explaining What the “Restore” Option is for Pensions posted May 10.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.


The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP© and not necessarily those of Raymond James. This is a hypothetical example for illustration purpose only and does not represent an actual investment. This is a hypothetical example for illustration purpose only and does not represent an actual investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Simplifying Your Retirement Plans

Co-Contributed by: Matthew E. Chope, CFP® Matt Chope and Gerri Harmer Gerri Harmer

If you’re like most, you have multiple retirement plans from previous employers. These may be hard to track and lead to piles of paper statements. Recent rulings make it easier to consolidate accounts and potentially save on fees.

Recent changes in rulings now allow most retirement plans to be “rolled over” to other qualified plans that previously were not allowed including Simple IRAs and 401ks. One exception is you must hold your Simple IRA for two years before funds can be moved in or out of the account without paying tax penalties.  Pictured is a chart showing permissible roll over types.

Things to consider before acting:

  • Compare investment offerings and fees for each account to find the best choice to roll into. These are usually located on your statement or in the prospectus. You can also call the phone number on your statement to inquire.
  • Consider consulting a financial advisor to get the best overall financial picture.
  • Funds must be withdrawn and redeposited within 60 days to avoid paying tax penalties.

If you have questions on how to get started, or want to talk with a professional on what your rollover options our, please reach out to your CERTIFIED FINANCIAL PLANNER™ here at The Center.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

Gerri Harmer is a Client Service Manager at Center for Financial Planning, Inc.®


The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Tax matters should be discussed with an appropriate tax professional.

Webinar in Review: Employee Benefit Open Enrollment

Contributed by: Clare Lilek Clare Lilek

Each September, as school is back in session and fall is right around the corner, the last thing on your mind is “How can I make the most of my employee benefit enrollment that’s happening soon?!” It may not be the most exciting topic, but enrollment for your employer’s benefit package happens once a year, usually in late September and early October, and can affect the benefits and coverage you receive for the following twelve months. So it is very much worth your time to look at what your company offers and weigh the pros and cons of all your options. Luckily for you, Nick Defenthaler, CFP®, recently hosted a webinar that outlines the various benefits your company could offer and how you may go about electing certain packages. Below are a few highlights from the 30-minute webinar. For a more detailed explanation, watch the full webinar recording below!

Retirement Savings Plans

  • Choosing a Traditional (pre-tax) or a Roth (post-tax) plan depends on your current tax bracket versus your projected tax bracket when you retire.
  • Make sure you are always maxing out your employer match at the very least. In order to make sure you are continually growing your retirement account, consider add 1-2% each year to your contributions.
  • Choose a mix of investment options that are aligned with your risk tolerance.
  • Ride out the changes in the market. It’s important not to make constant portfolio changes.

Executive Compensation Plans

These types of compensation plans are typically used as incentive compensation. They can vary from company to company but some of the options include: stock options, non-qualified deferred compensation plans, and employee stock purchase plans. We are currently doing a blog series on Stock Options (NSOs, ISOs, and RSUs); make sure to look out for these for a more detailed overview.

Health Insurance

Nick did a high-level overview of the different types of plans and options you may encounter when it comes to company health insurance. When choosing between a PPO or HMO, you could be choosing between the flexibility of additional benefits (PPO) or the lower cost for potentially more restrictive benefits (HMO). He also highlights the importance of reading the fine print when adding a spouse to your benefits. Lately, many companies have a spousal surcharge that makes it more expensive for a spouse to be insured on your plan if they have access to insurance through their own employer. Nick also noted that some companies are making the move to high-deductible plans, which lower their premiums but put the “buying power” back in the hands of the insured.

Flex Spending Accounts

Nick continued to describe the potential benefit of using a Flex Spending Accounts, whether it’s for medical or dependent care deductibles.  When pretax contributions are used for qualified medical expenses, within the year of contribution, they continue to go untaxed. To learn how you could potentially save some tax money, make sure to tune in to this part of the webinar!

Other Insurances

To wrap up, Nick went through disability insurance and life insurance options. He weighed the pros and cons for group vs individual coverage, and how some employees might want to consider long-term and short-term disability coverage.

If you have any questions about this webinar or your specific benefits, don’t hesitate to reach out to Nick.

401(k) for Solo Business Owners

Contributed by: Matt Trujillo, CFP® Matt Trujillo

If you're self-employed or own a small business, you've probably considered establishing a retirement plan. If you've done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they're relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan (which is also known by other names such as a solo 401(k) plan, an employer-only 401(k) plan, or a single participant 401(k) plan) may offer a better combination of benefits.

What is an individual 401(k) plan?

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. Unlike a regular 401(k) plan, however, an individual 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option.

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401(k) plan an attractive retirement savings vehicle is that in most cases your allowable contribution to an individual 401(k) plan will be as large as or larger than you could make under most other types of retirement plans. With an individual 401(k) plan you can elect to defer up to $18,000 of your compensation to the plan for 2016 (plus catch-up contributions of up to $6,000 if you're age 50 or older), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25% of your compensation (up to $265,000 in 2016).  Since your 401(k) elective deferrals don't count toward the 25% limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25% of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2016 cannot, however, exceed the lesser of $53,000 (plus any catch-up contributions) or 100% of your compensation.

For example, Dan is 35 years old and the sole owner of an incorporated business. His compensation in 2016 is $100,000. Dan sets up an individual 401(k) plan for his retirement. Under current tax law, Dan's plan account can accept a tax-deductible business contribution of $25,000 (25% of $100,000), plus a 401(k) elective deferral of $18,000. As a result, total plan contributions on Dan's behalf can reach $43,000, which falls within Dan's contribution limit of $53,000 (the lesser of $53,000 or 100% of his compensation). These contribution possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401(k) plans are simpler to administer than other types of retirement plans. Since they cover only a self-employed individual or business owner and his or her spouse, individual 401(k) plans aren't subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

Other Advantages of an Individual 401(k) Plan

Large potential annual contributions and straightforward administrative requirements are appealing, but individual 401(k) plans also have advantages that are shared by many other types of retirement plans:

An individual 401(k) is a tax-deferred retirement plan, so you pay no income tax on plan contributions or earnings (if any) until you withdraw money from the plan. And, your business's contribution to the plan is tax deductible.

  • You can, if your plan document permits, designate all or part of your elective deferrals as after-tax Roth 401(k) contributions. While Roth contributions don't provide an immediate tax savings, qualified distributions from your Roth account are entirely free from federal income tax.
  • Contributions to an individual 401(k) plan are completely discretionary. You should always try to contribute as much as possible, but you have the option of reducing or even suspending plan contributions if necessary.
  • An individual 401(k) plan can allow loans and may allow hardship withdrawals if necessary.
  • An individual 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP plan, or a previous employer's 401(k) plan.

Disadvantages

Despite its attractive features, an individual 401(k) plan is not the right option for everyone. Here are a few potential drawbacks:

  • An individual 401(k) plan, like a regular 401(k) plan, must follow certain requirements under the Internal Revenue Code. Although these requirements are much simpler than they would be for a regular 401(k) plan with multiple participants, there is still a cost associated with establishing and administering an individual 401(k) plan.
  • Your individual 401(k) plan assets are fully protected from your creditors under federal law if you declare bankruptcy. However, since an individual 401(k) plan generally isn't subject to ERISA, whether your plan's assets will be protected from your creditors outside of bankruptcy will be determined by the laws of your particular state.
  • Self-employed individuals and small business owners with significant compensation can already contribute a maximum $53,000 by using a traditional profit-sharing plan or SEP plan. An individual 401(k) plan will not allow contributions to be made above this limit (an exception exists for catch-up contributions that can be made by individuals age 50 or older).

If you think an Individual 401(k) might be the right vehicle for you, we encourage you to contact your financial planner to work through your individual situation to make the right choice for you.  Feel free to reach out to us if you think we can be of help!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.


This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of Raymond James. Prior to making a retirement plan decision, please consult with your financial advisor about your individual situation. Roth account owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Unpacking Incentive Stock Options

Contributed by: Matt Trujillo, CFP® Matt Trujillo

What is an ISO?!

Some of you reading this might have been granted Incentive Stock Options (ISOs) in the past or perhaps this is something that your employer recently started to grant you. In either case it never hurts to get a refresher on what they are and some of the nuanced planning opportunities that go with them. ISOs are a form of stock option that employers can grant to employees often to reward employees' performance, encourage longevity with the company, and give employees a stake in the company's success. A stock option is a right to buy a specified number of the company's shares at a specified price for a certain period of time. ISOs are also known as qualified or statutory stock options because they must conform to specific requirements under the tax laws to qualify for preferential tax treatment.

The tax law requirements for ISOs include*:

  • The strike price—the price you will pay to purchase the shares—must be at least equal to the stock's fair market value on the date the option is issued.
  • To receive options, you must be an employee of the issuing company.
  • The exercise date cannot be more than 10 years after the grant.

*Special rules may also apply if you own more than 10 percent of your employer's stock (by vote). Nonqualified stock options, another type of employee stock option, are separate from ISOs therefore receive different tax treatment.

Once you have been granted a stock option, you can buy the stock at the strike price even if the value of the stock has increased. If you choose to exercise a stock option, you must buy the stock within the specific time frame that was set when the option was purchased or granted to you. You are not required to exercise a stock option.

Your options may be subject to a vesting schedule developed by the company. Unvested options cannot be exercised until some date in the future, which often is tied to your continued employment. The stock that you receive upon exercise of an option may also be subject to a vesting schedule.

Assuming that a stock option satisfies the tax law requirements for an ISO, preferential tax treatment will be available for the sale of the stock acquired upon the exercise of the ISO, but only if the stock is held for a minimum holding period. The holding period determines if a sale of the stock you received through the exercise of an ISO is subject to taxation as ordinary income or as capital gain or loss.

To receive long-term capital gain treatment, you must hold the shares you acquired upon exercise of the option for at least:

  • Two years from the date you were granted the option, and
  • At least one year after the date that you exercised the option

So whether this is something new to you or something you’ve been handling for a long time, feel free to contact us with questions regarding the nuances around Incentive Stock Options.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.


This information does not purport to be a complete description of Incentive Stock Options, this information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing in stocks always involves risk, including the possibility of losing one's entire investment. Specific tax matters should be discussed with a tax professional.

Are your Medicare Premiums about to Increase?

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

If you’re like most, chances are you have not heard of what’s known as the “hold harmless” provision set forth under the Social Security Act. To keep things simple, this provision is essentially in place to protect the majority of those on Medicare from seeing jumps in Part B premiums when Social Security benefits do not increase through cost-of-living adjustments (COLA). 

For the second year in a row, due to low inflation, the hold harmless provision is coming into play. This year, there was no COLA for those receiving Social Security and 2017 is projected to only see a minuscule 0.2% bump in benefits. If you’re single and have an adjusted gross income (AGI) below $85,000 or are married and have an AGI below $170,000, your Medicare Part B premiums will not increase – you are part of the group whom the hold harmless provision protects (approximately 70% of those on Medicare). For those with income higher than the thresholds mentioned above, however, (which is approximately 30% of those on Medicare), you will more than likely see yet another increase in your Medicare Part B premiums in 2017 that is currently projected to be approximately 22%.    

It’s also important to note that those who are “sheltered” under the hold harmless provision (AGI below $85,000 for single filers, AGI below $170,000 for married filers) are only those who are currently receiving Social Security benefits. For example, if you’re 66 years old, receiving Social Security benefits and enrolled in Medicare, you will not see a jump in your Part B premium. If you’re currently age 64 but plan on delaying Social Security benefits until age 70, however, there is a very high probability that when you begin Medicare at age 65, your Part B premiums will be higher than they are for current enrollees. 

As mentioned previously, the same situation occurred last year and the actual increases in Medicare Part B premiums ended up being much less than what was initially projected (here’s a link to when I covered the topic last year). In October, we will be hosting a webinar on Medicare and we’re hoping to have more clarity on any potential premium increases at that time. Keep your eyes open for more information surrounding this topic and our October webinar! As always, if you have questions before then, please contact us.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.


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