You’re moving up in the world! With this new offer, you’re breaking into the upper echelons – an executive-level position with all the rights and responsibilities that entails. As exciting as it is to move into the next phase of your career, it can be daunting. Beyond the need to grow into your new responsibilities, you also have to make sure your compensation package is structured for the greatest benefit and impact to your financial future.
There are a bunch of things to consider before agreeing to the terms of your new job. Higher pay usually means more complicated tax implications. Your retirement package will also likely get a boost, but you need to make sure you’re contributing to it in a way that maximizes benefits to you, both now and in retirement. And there are tons of other complicated considerations you might be facing for the first time, like donor-advised funds and deferred compensation plans.
In this article, we’ll look closely at executive compensation analysis and strategy, and discuss the nuanced pay structures that make up executive compensation packages.
Getting Starting
What is executive compensation?
This is the total monetary compensation package for an executive- or C-Suite-level position. It includes salaries, bonuses, deferred compensation, and long-term stock-based incentives. In addition to income-based compensation, these plans also cover benefits like health insurance, retirement plans, and severance protections.
How can I structure my plan to contribute more to my 401(k)?
If eligible, a mega backdoor Roth conversion allows you to contribute large amounts of after-tax dollars to your 401(k) and convert those funds into a Roth IRA or Roth 401(k) to avoid immediate tax implications.
What is a 10b5-1 plan?
The 10b5-1 plan allows you to trade company shares at specific prices or times, providing a structured approach so that you can execute trades on your own without risking accusations of insider trading.
How can my compensation plan be optimized for tax savings?
Make charitable contributions to a donor-advised fund (DAF), take an immediate tax deduction, and then decide what charities you want to support with your donation.
Deferred compensation plans can reduce your taxable income when you elect to defer a part of your income to a later date, like when you’ve dropped into a lower tax bracket.
What Is Executive Compensation?
Executive compensation is your total compensation package consisting of executive salary, bonuses, deferred compensation, and long-term stock-based incentives. Beyond the actual money you’ll be paid, your package also covers benefits including health insurance, retirement plans, and severance protection.
When considering your offer, be aware that the competition for top-talent is fierce, and this company vying for your expertise, dedication, and loyalty knows they’re likely up against other offers. It’s important to understand every element of your offer and to negotiate from the strength of your position to build toward a healthy financial future.
Maximize Your 401(K) Contributions With A Mega Backdoor Roth Conversion
For high earners, leveraging a mega backdoor Roth conversion can significantly enhance your 401(k) contributions. This strategy allows you to contribute beyond the standard limit using after-tax dollars, which can then be converted into a Roth account. While the process may seem intricate, the benefits are clear. Let’s look a little deeper:
What is a Mega Backdoor Roth Conversion?
A mega backdoor Roth conversion is an advanced retirement savings strategy that allows you to contribute substantial amounts of after-tax dollars to your 401(k) plans and then convert those funds into a Roth IRA or Roth 401(k).
In other words, you can put more money in your retirement account without immediate tax implications, paving the way for tax-free growth and withdrawals in the future.
Important Mega Backdoor Roth Conversion details
Are you eligible for a mega backdoor Roth?
To execute a mega backdoor Roth, you must meet specific eligibility criteria:
- Your employer-sponsored 401(k) plan must permit after-tax contributions.
- The plan must offer in-service distributions, allowing you to convert after-tax contributions to a Roth IRA or Roth 401(k) while still employed.
- You should have surplus funds available for retirement savings beyond maxing out contributions to traditional 401(k) and Roth IRA accounts.
What are the contribution limits?
The maximum contribution limit for a mega backdoor Roth in 2024 is $69,000 for individuals under 50 years old and $76,500 for those aged 50 and older. This includes both employee and employer contributions, with the after-tax portion limited to $46,000. However, employer matching contributions may reduce the after-tax amount you can contribute.
Protect Yourself With A 10b5-1 Plan.
Your new executive position is probably going to face some trading restrictions built into whatever offer you receive. This is to both protect you against inadvertent improper activity, and to protect your company against unwarranted scrutiny from regulatory bodies. Many times, there may be a blackout period built into trading company stock, typically 30 days after earnings are released. One strategy to possibly get around these restrictions is called a 10b5-1 plan.
What is a 10b5-1 plan?
A 10b5-1 plan is a written agreement between you, an insider and major shareholder or corporate executive, and a brokerage firm. The plan allows you to sell company shares at specific prices or times, providing a structured approach so that you may execute trades on your own without risking accusations of insider trading, in accordance with your company’s insider trading policy.
A 10b5-1 plan is prohibited if you possess material nonpublic information (MNPI) about the company such as trade secrets, product development and release information, or R&D data that could lead to a significant market advantage in the future.
Reduce Your Taxable Income With a Donor-Advised Fund.
If you’re looking to make your charitable efforts more impactful while also reducing your taxable income, consider utilizing a donor-advised fund (DAF). These funds have been gaining popularity, with millions being donated through them each year.
What is a Donor-Advised Fund?
A DAF is a charity fund managed by a third-party organization. The beauty of a DAF lies in its flexibility and simplicity. Instead of making donations directly to charities, you contribute cash, securities, or other assets to your DAF, which then distributes the funds to the charities of your choice whenever you’re ready.
Pros of Donor-Advised Funds
- Immediate Tax Deduction: You can take an immediate tax deduction for the full value of your contribution, even if the funds are distributed to charities at a later date.
- Investment Growth: DAFs allow contributed funds to be invested, potentially generating investment returns over time. This feature can enhance the impact of your philanthropic efforts by increasing the total amount available for charitable grants.
- Streamlined Philanthropy: DAFs offer a consolidated platform for managing your charitable donations, simplifying administrative tasks and providing you with a streamlined approach to philanthropy.
Cons of Donor-Advised Funds
- Lack of Legal Requirement: DAFs are not legally obligated to distribute funds within a specific timeframe, potentially delaying their impact on charitable organizations.
- Limited Donor Control: In some cases, when the DAF is below $100K, it will go into a pooled account made up of other DAFs the investment custodian manages. In this case, you’re limited in how your funds are invested. If, however, your account is over $100k, you can assign a third party, like your financial planning team, to manage it on your behalf in accordance with your directions.
- Hidden Fees: DAFs may impose administrative fees, investment management fees, and account maintenance fees which can erode the amounts of your charitable contributions.
Lower Your Taxable Income Even Further With Deferred Compensation Plans.
A more substantial income means you have the privilege of being able to earmark your money for the distant future. It’s certainly important to save for your retirement, but saving for other financial eventualities is also critical. Whether you’ll need to pay for your child’s college tuition or to fund the long-term care of a parent, or you just want to sock away some money for a more tax-friendly moment, deferred compensation plans can help you save while also offering some tax benefits now and in the future.
What is a Deferred Compensation Plan?
Deferred compensation refers to a range of compensation plans that allow you to defer a portion of your income until a later date – perhaps for retirement or a child’s college tuition, or for a time when you’ve dropped into a lower tax bracket – thereby reducing your current taxable income.
While there are various types, we’ll focus on nonqualified deferred compensation (NQDC) plans, often referred to as supplemental executive retirement plans or elective deferral plans. Unlike qualified plans such as 401(k)s, there are no limits imposed by the IRS as to how much you can contribute to an NQDC plan.
Since NQDCs are not governed by the Employee Retirement Income Security Act (ERISA), you have more options but less regulatory protection. In other words, these plans can reap great rewards, but you assume more risk.
Benefits of deferred compensation plans
- Deferred Taxation: With a deferred compensation plan, you and your employer can collaborate to determine the most suitable time for you to receive the funds.While most NQDC plans are subject to payroll taxes at the time you make your contributions, you won’t be on the hook for federal and state income taxes until the funds are actually paid out to you.
- Ability to Save: Opting for a deferred compensation plan allows you to reserve a specific amount of your earnings to a future date when you may have moved into a lower tax bracket, reducing your taxable income in the process.
Bottom Line
Remember that your compensation is a testament to your hard work, dedication, and expertise. You’ve earned this offer. As you go through this process, be sure that the package is structured to help you maximize your long-term savings, strategize around your tax exposure (both now and down the line), and ensure that you’re on the right side of all laws and regulations. By prioritizing long-term financial planning and aligning your compensation strategy with your personal and professional goals, you can secure a prosperous and rewarding future for yourself and your loved ones.
Conclusion
The offer is in front you. Now’s the time to take action. Once you’ve reviewed your compensation package, you’ll probably still have questions. It’s always wise to have experts in your corner for significant moments like this.
Financial professionals who specialize in executive compensation planning, tax optimization, and wealth management are a great resource when navigating this important moment in your life. They can provide personalized advice based on your unique circumstances, help you understand complex regulations, and develop tailored strategies to maximize your compensation while mitigating risks and effectively managing taxes.
At SK Wealth, our financial planners are all about helping you make informed choices regarding your compensation offerings and your long-term financial health. Refined over the last 25 years, our financial planning process, known as The Integrated Financial Advantage™, provides personalized recommendations to empower you to live with intention, tomorrow and today.
